A firm is worth $50 or $180 with equal probability and is financed with debt that has a face value of $60. It is considering a new project that is equally likely to be worth - $50 or +$40. The cost of capital is 12% for all securities. 1. Calculate the present values of the firm’s debt and equity, assuming that the project is not undertaken. 2. What will happen to the value of the firm if the new project is undertaken?

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