EPL ltd is considering to undertake a new project. if the project fails (bad state) EPL will be worth only $400 million, but if successful (good state) it will be worth $1,000. The current value of epl is $650 million . EPL has outstanding zero-coupon bonds due in one year with a face value of $400 million. risk free rate is 5% p. EPL pays no dividends.

What is current value of EPL's equity?

suppose that EPL's management decides to undertake a high risk project. the value of the firm will either increase to 1300 million or decrease to 100 m by the end of the year. management concludes that the value of the firm today will remain exactly 650 million. what is the current value of epls equity?

which project would shareholders prefer? (low risk, high risk, indifferent justify answer.

use the risk neutral valuation to determine the values of the firms equity in above if the firms plans on undertaking the high risk project.