A firm (with face value of debt = $100) is to choose between two mutually exclusive projects: PROJECT A: LOW-RISK PROBABILITY Firm Value Stock Value Debt Value RECESSION 0.5 100 0 100 BOOM 0.5 200 100 100 PROJECT B: HIGH-RISK PROBABILITY Firm Value Stock Value Debt Value RECESSION 0.5 50 0 50 BOOM 0.5 240 140 100 Answer the following questions: a) Consider first the case where the firm is an all equity firm. Which project will the firm choose? b) With the current face value of debt = $100, which project will it implement if management is to maximize shareholders’ value? c) What is the price debt holders will pay for the debt? d) Calculate the agency cost of debt.