An entrepreneur has to finance a project of fixed Size I. the entrepreneur has cash on...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
An entrepreneur has to finance a project of fixed Size I. the entrepreneur has cash on hand A where A <I. To implement the project the entrepreneur(that is the borrower) must borrow I-A from lenders. If undertaken, the project either succeed, in which case it yields a return R > 0, or fails, in which it delivers a Zero return. The probability of success depends on the effort exerted by the borrower: if the borrower exerts effort, the probability of success if ph, if the borrower exerts no effort, the probability of success is equal to pl, where Delta P=ph - pl >0. If the borrower exerts no effort, he also obtains a private benefit B > 0, while if there is no private benefit when the borrower exerts effort. Define as Rb the amount of profit going to the borrower, and as Rt the amount of profit going to the lenders in case of success, where R = Rb + R1. All the players are risk neutral. Lenders behave competitively, and both borrower and lenders receive zero if the project fails a) Write down the Net Present Value of the project when the borrower exerts effort and no effort b) What is the minimum level of Rb such that the borrower exerts high effort? Show your work c) What is the minimum level RI such that lenders are willing to lend money to the borrower? Show your work d) Suppose A = 0, Can the borrower obtain a lenders? Explain your answer An entrepreneur has to finance a project of fixed Size I. the entrepreneur has cash on hand A where A <I. To implement the project the entrepreneur(that is the borrower) must borrow I-A from lenders. If undertaken, the project either succeed, in which case it yields a return R > 0, or fails, in which it delivers a Zero return. The probability of success depends on the effort exerted by the borrower: if the borrower exerts effort, the probability of success if ph, if the borrower exerts no effort, the probability of success is equal to pl, where Delta P=ph - pl >0. If the borrower exerts no effort, he also obtains a private benefit B > 0, while if there is no private benefit when the borrower exerts effort. Define as Rb the amount of profit going to the borrower, and as Rt the amount of profit going to the lenders in case of success, where R = Rb + R1. All the players are risk neutral. Lenders behave competitively, and both borrower and lenders receive zero if the project fails a) Write down the Net Present Value of the project when the borrower exerts effort and no effort b) What is the minimum level of Rb such that the borrower exerts high effort? Show your work c) What is the minimum level RI such that lenders are willing to lend money to the borrower? Show your work d) Suppose A = 0, Can the borrower obtain a lenders? Explain your answer
Expert Answer:
Answer rating: 100% (QA)
a The Net Present Value NPV of the project when the borrower exerts effort is NPVeffort ph Rb I A 1 ... View the full answer
Related Book For
Posted Date:
Students also viewed these electrical engineering questions
-
A developer wants to finance a project costing $1.5 million with a 70 percent, 25-year loan at an interest rate of 8 percent. The projects NOI is expected to be $120,000 during year 1 and the NOI, as...
-
Explain why the balance of cash on hand and at bank is always audited, and why a substantive approach is preferred.
-
An entrepreneur has to plan the daily production of shoes of her manufacturing business. The company produces 5 different shoe models thanks to the labor of three craftsmen. The time (in hours...
-
Determine how current values might be determined for investments, land, buildings, equipment, patents, copyrights, trademarks, and franchises. How might the use of current values in the accounting...
-
As the owner of a small, hometown drugstore, how would you prepare for a Walmart being built in your area?
-
In a personal worldview, should individuals have a right to medical care? Are there any instances when medical care should not be considered a right?
-
How has the use of HRIS evolved over the past 10 years in organizations, and how might this influence an organizations evaluations of additional investments in new or updated HRIS functionality?
-
Evaluate the professional judgment used by Kang and the firm in assessing the client's accounting and reaching its own decision to accept it?
-
The target closing inventory for pairs of shoes is 12% of next quarter's sales. The target closing inventory for direct materials is 20% of next quarter's materials requirement. The business...
-
Carrie DLake, Reed A. Green, and Doug A. Divot share a passion for golf and decide to go into the golf club manufacturing business together. On January 2, 2020, DLake, Green, and Divot form the...
-
A company is thinking about introducing a new product line. Below are the expected per - unit variable costs associated with producing and selling the new product: Sales price $ 1 0 0 Direct...
-
Use the information and construct Common size balance sheet Balance sheet as a percentage of sales Assets Cash & securities Accounts receivable Inventories Prepaid expenses Total current assets Plant...
-
1. Compute the product margins for the Xtreme and the Pathfinder products under the company's traditional costing system. 2. The company is considering replacing its traditional costing system with...
-
a. Construct an equal-weighted (50/50) portfolio of investments B and C. What are the expected rate of return and standard deviation of the portfolio? Explain your results.(6 Points) b. Construct an...
-
A. Calculate the MAD for the period 2017-2019 (2 points) B. Calculate the 2020 forecast using Exponential Smoothing. The smoothing constant (a) is 0.30. (2 points) C. Using the information below and...
-
Find all zeros (x intercepts) of the polynomial function using the rational zero theorem, factor theorem and remainder theorem, and synthetic division. When you have found enough zeros such that your...
-
As of 11:48 AM on December 15, 2021, Roku's common stock was trading at $196.55. At the same time a put option on Roku stock with an exercise price of $190 that expires on February 18, 2022 was...
-
Outline a general process applicable to most control situations. Using this, explain how you would develop a system to control home delivery staff at a local pizza shop.
-
The first audit of the books for Ringer Company was made for the year ended December 31, 2013. In reviewing the books, the auditor discovered that certain adjustments had been overlooked at the end...
-
Mullen Equipment Company both leases and sells its equipment to its customers. The most popular line of equipment includes a machine that costs $280,000 to manufacture. The standard lease terms...
-
Comparative income statements for Xenon Corporation for 2013 and 2012 follow. 1. Prepare common-size income statements for Xenon Corporation for 2013 and 2012. 2. Return on sales for Xenon is lower...
-
The solar system is like an atom in that both (a) are governed principally through the electric force. (b) consist of a central body surrounded by objects moving in elliptical paths. (c) are composed...
-
When a contracting hot ball of gas spins into a disk shape, it cools faster due to (a) increased radiation transfer. (b) increased surface area. (c) decreased insulation. (d) increased convection...
-
Compared to your weight on Earth, your weight on Jupiter would be about (a) 3000 times as much. (b) half as much. (c) 3 times as much. (d) 300 times as much. (e) 100 times as much.
Study smarter with the SolutionInn App