Read the question carefully and show all of your work

Read the question carefully and show all of your work clearly on the short-answer problems as partial credit will be given.1. Fountain Corporation economists estimate that the probability of a good business environment next year is equal to the probability of a bad environment. Knowing this, the managers of Fountain must choose between two mutually exclusive projects. Suppose the payoff from the chosen project is the only future cash flow expected by the firm. Fountain is obliged to make a $1000 payment to its bondholders next year. Here is a description of the projects: Low Risk Project                        Probability   Payoff    Value of Stock    Value of BondsRecession              .5             1000               0                        1000Boom                     .5            1400            400                       1000 High Risk Project                         Probability   Payoff    Value of Stock   Value of BondsRecession               .5              200               0                          200Boom                      .5            1600            600                       1000 Which project will the stockholders prefer? Which project maximizes the value of the firm? Why are these answers different?

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