Sunburn Sunscreen has a zero coupon bond issue outstanding with a $25,000 face value that matures in one year. The current market value of the firm’s assets is $26,100. The standard deviation of the return on the firm’s assets is 34 percent per year, and the annual risk-free rate is 5 percent per year, compounded continuously. The firm is considering two mutually exclusive investments. Project A has an NPV of $2,600, and Project B has an NPV of $3,500. As the result of taking Project A, the standard deviation of the return on the firm’s assets will increase to 54 percent per year. If Project B is taken, the standard deviation will fall to 36 percent per year.
a-1 What is the value of the firm’s equity and debt if Project A is undertaken? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Market value
Equity $ Debt $
a-2 What is the value of the firm’s equity and debt if Project B is undertaken?