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Consider the following economy with three dates (t=0, 1, 2). A firm needs to raise $100 to finance a project at t=0. At t=2,

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Consider the following economy with three dates (t=0, 1, 2). A firm needs to raise $100 to finance a project at t=0. At t=2, the project is either a failure and pays off nothing or generates $400. Both states are equal likely. At t=1, the firm learns about the outcome of the project. If it is a success it expands the project and raises additional capital by conducting a secondary offering which is observable in the market. If the project is a failure there is no additional capital needed. There is an early consumer who has $100 at t=0 and the utility function UE = CEO +1.2.min[CE,100] + max[CE1 -100,0]+CE2. In addition, there is a late consumer who has W=$320 at t=1 and the utility function U = C0 + C +C2. Suppose the firm issues equity at t=0. If the early consumer buys equity at t=0, he sells his equity holding to the late consumer at t=1. a) b) What equity contract does the firm offer the early consumer so as to get $100? What is the fraction of equity the firm is selling? [6 Points] What is the price of the equity at t=1 if there is no additional equity issuance? What is the price of the equity at t=1 if there is secondary equity offering? [4 Points] What is the expected profit of the firm? [2 Points]

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