6.a. Low Risk project .5*500+.5*700 = $600 High Risk project .5*100+ .5*800 = $450
The low risk project maximizes the expected value of the firm because the expected value of the project is higher.
b. Low risk project .5*0+.5*200 = $100 High risk project .5*0+.5*300 = $150
c. Fountain’s shareholders would prefer the high risk project because it maximizes expected value of the firms equity.
d. 100 = .5*0 + .5*(800-X) X = $600
Bondholders would need to raise the debt payment by $100 to $600 to make the high-risk project indifferent for Fountain’s equity holders.

10.a.1. VL = VU + [ 1 – {(1 – TC)(1 – TS) / (1 - TB)}] * B VL = VU + [ 1 – {(1 – .4)(1 – .3) / (1 - .3)}] * 13,500,000 VL = VU + [ 1 – .6] * 13,500,000 VL = VU + 5,400,000
2. Unlevered $3,000,000 * .4 + 1,800,000 * .3 = $1,740,000 to the IRS Levered $1,650,000*.4 + 1,350,000*.3 + 990,000 * .3 = $1,362,000 to the IRS
The IRS would prefer the unlevered structure of Fortune Enterprises because they would get more tax revenue.
3. Vu = 1,800,000 * (1-.3) = $1,260,000 / .2 = $6,300,000 VL = Vu + [ 1 – {(1 – .4)(1 – .3) / (1 - .3)}] * 13,500,000 VL = 6,300,000+ 5,400,000 = $11,700,000
b. 1. Equity
CFU = 1,800,000 * ( 1-.2) = $1,440,000 CFL = 990,000 * ( 1-.2) = $792,000
2. Debt
CFU = 0
CFL = 1,350,000 * ( 1-.55) = $607,500

13.a. Expected earnings = .1 * 1000 + .4 * 2000 + .5 * 4200 = $3000 VU = 3000/.2 = $15,000
b. 1. VU = VL = $15,000 according to MM with no corporate taxes
2. VL = B + S 15,000= 7500 + S S = $7,500
3. rS = r0 + (B/S)(r0 – rB) rS = .2 + (7500/7500)(.2 – .1) rS = .3
4. rwacc = {B / (B+S)} rB + {S / (B+S)}rS rwacc = {7500 / (15000)} .1 + {7500/ (15000)}.3 rwacc = .2
c. 1. The value of the firm will decrease with the presence of corporate taxes. This is because all things equal, if the firm has to pay the IRS they