Question: 4. Dark Creek Corporation's CEO is selecting between two mutually exclusive projects. The company needs to make a $3,500 payment to bondholders at the

4. Dark Creek Corporation's CEO is selecting between two mutually exclusive projects.

4. Dark Creek Corporation's CEO is selecting between two mutually exclusive projects. The company needs to make a $3,500 payment to bondholders at the end of the year. To minimize agency costs, the firm's bondholders decide to use a bond covenant to stipulate that the bondholders can demand an additional payment if the company chooses to take on the high- volatility project. How much additional payment to bondholders such that the expected payoff for bondholders would be the same for the two projects? Cash flows pertaining to the two projects are shown in the table below. [2 marks] Economy Probability Low-Volatility Project Payoff High-Volatility Project Payoff Bad .40 Good .60 $4,000 4,800 $2,900 6,300

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