Hiroko Fashion Corporation (HFC) can pursue either project Dress or project Cosmetic, with possible payoffs at year-end as follows:
![1112_a3cb1453-bf39-45ff-abba-323ab8ed1091.png](https://secure.tutorsglobe.com/CMSImages/1112_a3cb1453-bf39-45ff-abba-323ab8ed1091.png)
Each project costs $6 million at the beginning of the year. Assume there are no taxes, there are no direct bankruptcy costs, all investors are risk neutral, and the risk-free interest rate is zero.
a. Which project should HFC pursue if it is all equity financed? Why?
b. If HFC has a $5 million bond obligation at the end of the year, which project would its equity holders want to pursue? Why?