This question considers the effect of increasing date$2($future$)$ revenue on the example of creditor and debtor preferred debt developed in class. Assume that all of the assumptions of that example are satisfied except that revenue in state $2$ at date $2$ is given by R$2=500$ and that the undertaking the investment requires an investment of K $=85.$

a$.$ Can the project be financed by creditor preferred debt? If your answer is no$.$ Explain why. If you answer is yes, what is the face value of this debt? $$

b$.$ Can the project be financed by debtor$-$preferred debt? If your answer is no$.$ Explain why. If you answer is yes, what is the face value of this debt? $$

c$.$ In class, we only considered debt that was due at date $1.$ Clearly, regardless of the state, cash flows at date $2$ exceed the required investment by a wide margin. Why not finance the project with debt due at date $2?$

d$.$ The nominal interest rate on one$-$period debt is the difference between the face value of the debt and the proceeds of the debt issue divided by the proceeds of the debt issue,$($ f $$ K$)/$K$.$ Frequently, firms assert that obtaining low interest rate financing implies that the firm has obtained $$cheap$$ financing. Based on your analysis, do you think that low interest rates necessary imply that debt financing is $$cheap$?$