Question: BallGame.com Inc. is considering undertaking one of the two mutually exclusive projects: A and B. The firm is currently valued at $100M. Assume zero discount

BallGame.com Inc. is considering undertaking one of the two mutually exclusive projects: A and B. The firm is currently valued at $100M. Assume zero discount rate. Projects A and B have the following cash flows:

Assets=$100 million

Discount rate= 0

Debt holders F=50

Shareholders F=80

	Company A	Company B
Cash flows in year 0 (initial costs)	-50	-50
Good state (prob. 1/3) at the end of year 1	170	140
Neutral state (prob. 1/3) at the end of year 1	100	120
Bad state (prob. 1/3) at the end of year 1	0	40

1) Assume that the company has debt with face value of F. What is the expected value to debtholders and shareholders, respectively, if Project A is undertaken? (4 marks)

2) Assume that the company has debt with face value of F. What is the expected value to debtholders and shareholders, respectively, if Project B is undertaken? (4 marks)

3) What is the indifference face value for debt so that at this face value F, debtholders are indifferent between project A and B? (1 mark)

4) What is the indifference face value for debt so that at this face value F, shareholders are indifferent between project A and B? (1 mark)

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