QUESTION 1

1. Onlyland Inc. has only one asset a plot of vacant land. Onlyland Inc. also has only one liability - debt of $15 million due in one year. If left vacant, the land will be worth $12 million in one year. Alternatively, Onlyland can develop the land at an upfront cost of $20 million. The developed land will be worth $37.5 million in one year. Suppose the risk-free interest rate is 2%, assume all cash flows are risk-free, and assume there are no taxes.

   a. If the firm chooses not to develop the land, the value of the firm's equity today is $ million. (Input number only as your answer. Round it to the nearest whole number.) The value of the firm's debt today is $ million. (Input number only as your answer. Round it to the nearest whole number.)

   b. Suppose the firm raises $20 million from equity holders to develop the land. If the firm develops the land, the value of the firm's equity is $ million. (Input number only as your answer. Round it to the nearest whole number.) The value of the firm's debt today is $ million. (Input number only as your answer. Round it to the nearest whole number.)

   c. If equity holders decide not to develop the land, the agency cost (value destroyed) is $ million. (Input number only as your answer. Round it to the nearest whole number.)