1. Suppose there are two kinds of companies, good and bad ones. Both types of companies are faced with an investment opportunity that requires an investment of $6M today (year 0) and can give a high or a low cash flow in year 2, but they differ in the probabilities of the high and the low cash flows as follows: Probability of cash flow Cash flow Good Company Bad Company There are as many good as bad companies around and the discount rate is zero. Assume that managers (who are also the initial owners of the companies) know whether their company is good or bad in period 0, but investors do not know until year 1 (after the investment is made but before the cash flow uncertainty is resolved). The companies need to raise capital in year 0. Managers suffer a huge personal loss if the company goes into financial distress (they die from a stroke). They want to avoid that at any cost. Therefore, they cannot finance the investment with normal debt. First assume that companies can only raise capital by issuing equity. a) If all companies issue equity, what proportion of year 2 cash flows will investors demand to finance the SEM investment in year 0