c) If the wealth of entrepreneurs is distributed following a uniform dis- tribution between 0 and...

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c) If the wealth of entrepreneurs is distributed following a uniform dis- tribution between 0 and 1. What fraction of entrepreneurs will receive finance? Ph (R-D) > Pi (R-D) + b I - w D = Ph Ap R I - w Ph > b b > Ph - PhR+I In our case we would have b w > Ph PhR+ I = 0,23 d) Assume that there are outside financiers that are specialists and can reduce the private benefits to 0.05 at a cost of 0.1 per project. Which fraction of entrepreneurs will receive finance? Which fraction of them will be receiving at least part of their finance from specialists? Ph (DD) c > p (D-Di) - Di D > I - w Ph C + Di Ap (R- Ap I - w Ph > b' b' > Ph + Ph Ap PhRI=0.1425 Hence 85,75% of entrepreneurs will receive finance and 8,75% from specialists e) Assume that the initial entrepreneur has wealth of 0 private benefits of 0.05 and a senior debt of value 0.35 that cannot be renegotiated. It needs 1 unit from new investors that will be junior debt holders. Will the project be funded? Is there a way in which the project can be funded if the senior debt holders renegotiate the value of their debt? How much is the maximum that the old debt holders receive in expected terms? In this situation we now that the wealth needed if debt can not be renego- tiated is b w > Php - Ph R+I+ phF.where F is the face value. Which in our case does not suffice as 0 <0.2125 Can debt be renegotiated? Yes as current debt holders are receiving 0 in expectation. The maximum that they would receive can be solved by solving 2 Consider a situation in which an entrepreneur has the possibility of under- taking a project which in case of success has gross returns of 1.6. The project has some initial investment that costs 1. The project can be run in a responsible way which means that it has a probability of success of 0.7 or in an irresponsible way which has a probability of success of 0.3. The private benefits of the irre- sponsible way (that only the entrepreneur enjoys) are 0.2. The entrepreneur has wealth of 0.5. The entrepreneur will use all his wealth in the project. All of the agents have no discount across periods and financiers are perfectly competitive. c) If the wealth of entrepreneurs is distributed following a uniform dis- tribution between 0 and 1. What fraction of entrepreneurs will receive finance? Ph (R-D) > Pi (R-D) + b I - w D = Ph Ap R I - w Ph > b b > Ph - PhR+I In our case we would have b w > Ph PhR+ I = 0,23 d) Assume that there are outside financiers that are specialists and can reduce the private benefits to 0.05 at a cost of 0.1 per project. Which fraction of entrepreneurs will receive finance? Which fraction of them will be receiving at least part of their finance from specialists? Ph (DD) c > p (D-Di) - Di D > I - w Ph C + Di Ap (R- Ap I - w Ph > b' b' > Ph + Ph Ap PhRI=0.1425 Hence 85,75% of entrepreneurs will receive finance and 8,75% from specialists e) Assume that the initial entrepreneur has wealth of 0 private benefits of 0.05 and a senior debt of value 0.35 that cannot be renegotiated. It needs 1 unit from new investors that will be junior debt holders. Will the project be funded? Is there a way in which the project can be funded if the senior debt holders renegotiate the value of their debt? How much is the maximum that the old debt holders receive in expected terms? In this situation we now that the wealth needed if debt can not be renego- tiated is b w > Php - Ph R+I+ phF.where F is the face value. Which in our case does not suffice as 0 <0.2125 Can debt be renegotiated? Yes as current debt holders are receiving 0 in expectation. The maximum that they would receive can be solved by solving 2 Consider a situation in which an entrepreneur has the possibility of under- taking a project which in case of success has gross returns of 1.6. The project has some initial investment that costs 1. The project can be run in a responsible way which means that it has a probability of success of 0.7 or in an irresponsible way which has a probability of success of 0.3. The private benefits of the irre- sponsible way (that only the entrepreneur enjoys) are 0.2. The entrepreneur has wealth of 0.5. The entrepreneur will use all his wealth in the project. All of the agents have no discount across periods and financiers are perfectly competitive.

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