$1*.$ You want to set up a company with limited liability. Your initial investment is $900.$ You

have $300$ of your own and you get $300$ each from your grandma and your uncle that you

promise to pay back in one year if things go well. Your relatives do not want any interest.

In one year you will leave Warwick for your semester abroad. At that time you are

liquidating the firm. There are four potential outcomes at that time: $1350,750,450,150$

$($see graphs$).$ Use the graphs $($a$)$ to $($c$)$ to answer the following questions.

$($a$)$ Who is an equityholder and who is a debtholder in your company? How much will

equity$-$ and debtholders get in each outcome next year?

$($b$)$ Your uncle is paid fully before your grandma gets a cent. How do you call the two

types of debt contracts? Which kind of debt is more risky? How much will equity$-$ and

debtholders get in each outcome in this case next year?

$($c$)$ Your company is in desperate need for new equipment. As you are short of money, you

sell preferred shares of your company for $100$ giving the following cash flow rights:

The first $50$ of equity are entirely for the preferred shares. From every $1$ for total

equity that exceeds $50,$ preferred shareholders will get $25$ p$.$ How much will equity$-$ and

debtholders get in each outcome in one year?