All the remaining questions are under one long problem.

Boring Inc. works to enhance the quality of living by significantly reducing commute times in US. To achieve this goal, the company plans to build a network tunnels that will effectively transform the transportation network into a three-dimensional space. This is a 1% (one percent) chance that it will succeed, but if it does, the return on firms current assets will be phenomenal. Assume that the firm currently has assets in place that will be worth either $1 trillion (good state) if it succeeds or $500 million (bad state) if it fails in the next period. The Boring Inc. has debt outstanding with a face value of $600 million that must be repaid next period. The discount rate is zero and the interest rate on a risk-free bond is 0.

a. What is the market value of Boring's debt (in millions)?

b. What is the market value of Boring's equity (in millions)?

Boring Inc. now decided to expend to Canada. This expansion requires an investment of $250 million today. This project generates $300 million in both good and bad state, and they can finance the project only by issuing equity.

c. What is the NPV of the new project (in millions)?

d. What is the expected net payoff (in millions) to shareholders if Boring undertakes the new project? (Hint: Net payoff = Payoff - Cost)

e. Shareholders will accept the new project.

Group of answer choices

True

False