QUESTION $1.$ PARTA. $[3$ points$]$ Suppose a company borrows $$1$ million debt to invest in a project that generates

uncertain cash flow $($revenue$)$ of $0$$$2$ million. The debt has to be repaid $($interest rate is zero$)$ when the project's

cash flow is realized. Clearly mark where the lines start, end and change direction

$1-1.$ Assume $80\%$ of the cash flow $($revenue$)$ is lost upon bankruptcy $($i$.$e$.,$ when debtholders control the firm$).$ Also,

assume that renegotiations are allowed and the manager may be allowed to stay if debtholders find it better than

firing. Upon renegotiation debt and equity holders have $2$:$3$ bargaining power. Draw value of debt, equity, and the

company.

$1-2.$ For Question $2-1,$ at what company cash flow does strategic default start to occur?

$1-3.$ Strategic debt service is an example of $($

$,$ where each party to a contract worries about

being forced to accept disadvantageous terms later $($e$.$g$.$ reduction of debt repayment through renegotiation$),$ after it

has sunk an investment $($e$.$g$.$ lending money$).$ Fill in the blank.