What is the expected gross and net return

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The return on an investment is known to be either +100 percent, 0 percent, or - 50 percent with equal probabilities. Outside lenders lend at zero interest rate but they refuse to take risk. Owners try to finance as large a share as possible of the project by debt and the rest is financed with equity.

A. What is the expected return, in percent, on the investment project? How large a share of the investment can be financed by loans?

B. What is the expected gross and net return to the shareholders?

C. What is the maximum and minimum gross return (in percent) for the shareholders?

D. The bank is willing to lend at zero percent interest rate only if they get a profit share of 10% (of the whole project) in the best outcome. What is the expected percentage net return on the investment for the shareholders and for the bank of the project now?

Reference no: EM133002226

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