Volunteer Industries has a bond issue with a face value of $1,000 that is coming due in one year. The value of Volunteer’s assets is currently $1,200. Phil Fulmer, the CEO, believes that the assets in the firm will be worth either $800 or $1,400 in a year. The going rate on one-year T-bills is 4 percent.

a. What is the value of Volunteer’s equity? The value of the debt?

b. Suppose Volunteer can reconfigure its existing assets in such a way that the value in a year will be $500 or $1,700. If the current value of the assets is unchanged, will the stockholders favor such a move? Why or why not?