Consider an entrepreneur who lives in a world in which Modigliani-Miller holds. She has an idea for a new product, but to implement the idea, she needs $5000. Once she makes that $5000 investment, the payoff will be $8000 in the good state (outcome), and $4000 in the bad state. The two outcomes are equally likely. Given this level of risk for the project, the cost of capital for the project is 10%. The risk-free interest rate is 0.05.

a. What is the market value of assets for this project?

b. Describe how the entrepreneur could finance the project with 50% debt and 50% equity. In terms of the equity, how many shares should the entrepreneur issue if she wants the price per share to be $1? Assuming that the full $5000 is raised externally (the entrepreneur doesnt provide any of that $5000), does the entrepreneur own any shares? If so, how many?

c. Could the entrepreneur raise the needed $5000 by issuing $5000 in debt? Explain why the debt would be risky in this case. Assuming that this riskiness means that investors would demand an expected return of 8% on the debt, what would the coupon rate on the debt have to be in order for investors to be willing to purchase it for $5000?

d. If the full $5000 were raised via debt, what would the equity be worth? What would its expected return be?