1, Part I: Thomas, a risk-neutral investor, is contemplating a one-year 10% loan of $500 to Morgan's Firm. Thomas demands at least a 7% expected return per annum on loans like this. Thomas is concerned that the firm may not be able to pay the interest and/or principal at the end of the year. A further concern is that if he makes the loan, Morgan's Firm may engage in additional borrowing. If so, Thomas's security would be diluted, and the firm would become riskier. Since Morgan's Firm is growing rapidly, Thomas is sure that the firm would engage in additional borrowing if he makes the loan. Thomas examines Morgan's Firm's most recent annual report. He calculates an interest coverage ratio (the ratio of net income before interest and taxes to interest expense) of 4, including his contemplated $500 loan. Upon considering all of these matters, Thomas assesses the following probabilities: Probability Payoff 01: Interest and principal repaid 02: Reorganization, principal repaid but not interest 03: Bankrup