Firm should NOT care about risk To Purchase This Material Click below Link http://www.tutorialoutlet.com/all-miscellaneous/pleaseexplain-briefly-explain-using-ideas-discussed-in-classwhy-a-firm-should-not-care-about-risk/ FOR MORE CLASSES VISIT www.tutorialoutlet.com a. Please explain briefly explain (using ideas discussed in class) why a firm should NOT care about risk. (2-3 sentences) b. Please explain briefly (using ideas discussed in class) two reasons given in class why a firm SHOULD care about risk. (2-3 sentences) 2. Index vs indemnity triggers. a. Please explain briefly what an index trigger is and how it is different from an indemnity trigger. (1-2 sentences) b. What are two key advantages discussed in class of using index triggers instead of indemnity triggers? (1-2 sentences) c. What is one key advantage discussed in class of using indemnity triggers instead of index triggers? (1 sentence per advantage) 3. Consider an entrepreneur with no wealth but a great idea. The entrepreneur wants to raise $1 million needed to start a business. The entrepreneur is
rational, maximizes expected utility and is risk neutral. There is a 75 percent chance that the business will go well and make money, in which case the business will generate $1.5 million; there is a 25 percent chance that the business will go badly and lose money, in which case it will generate only $0.5 million. The entrepreneur can raise money from o a bank loan (in which case the entrepreneur receives $x million from the bank promises to pay the bank a fixed dollar amount out of the proceeds from the business) and/or from o issuing stock (in which case the entrepreneur receives $x million from stock investors and promises to pay them a percent of what is left over after the bank loan has been repaid). Both the bank and the stock investors would be willing to accept an expected return of zero, so that they would be willing to put in $1 million for the promise of getting $1 million back on average. There are no taxes. In the event of bankruptcy, legal fees will total $100,000. a. Imagine that the entrepreneur funds the project by raising $700,000 from a bank loan and $300,000 from issuing stock. i. What amount must the entrepreneur promise to repay the bank (except in bankruptcy, when the bank will only get the remaining proceeds after legal fees) to make them willing to lend?
ii. What proportion of the company (the proportion of the proceeds after the bank has been repaid) must the entrepreneur give to the stock investors? iii. Please fill in the following amounts that will be received by each party if the project goes well, if it goes badly, and on average Project goes well Project goes badly Expected outcome Bank Stock investors Entrepreneur Lawyers Total b. Imagine that the entrepreneur funds the project by raising $500,000 from a bank loan and $500,000 from issuing stock. i. ii. iii. What amount must the entrepreneur promise to repay the bank (except in bankruptcy, when the bank will only get the remaining proceeds after legal fees)? What proportion of the company (the proportion of the proceeds after the bank has been repaid) must the entrepreneur give to the stock investors? Please fill in the following amounts that will be received by each party if the project goes well, if it goes badly, and on average.
Project goes well Project goes badly Expected outcome Bank Stock investors Entrepreneur Lawyers Total c. Which financing approach (a) or (b) makes more sense for the entrepreneur? Please explain briefly and quantify the size of the benefit of using the better approach. d. How much would the entrepreneur be willing to pay for full insurance (if he could precommit to buy this insurance before raising money for his project) in case (a) and in case (b)?