Entrepreneur has an investment project that will give him a random rate of return r between the current period ( t = 0) and next period (t = 1). The entrepreneur has $100,000 of his/her own cash to invest but is raising additional funds through the sale of stocks (equity) and bonds to investors. The entrepreneur promises to pay 7% to bondholders. Suppose the entrepreneur raises $250,000 in the sale of stock and $750,000 in the sale of bonds. The entrepreneur invests his/her own funds together with the proceeds from the stock and bond sale into the risky investment project. At t = 1 the entrepreneur distributes bond and equity payments and the project is complete.

1) If the entrepreneur had not sold any stock or bonds, what would have been his/her rate of return on their own assets?

2) Assume the entrepreneur earns a -50% rate of return on the investment project.

a.The bond payment to bondholders.

b. Equity payment to equity holders (not including the entrepreneur himself/herself).

c. Amount retained by the entrepreneur.

d. The rate of return the entrepreneur earns on his/her own assets

3) Assume the entrepreneur earns a -50% rate of return on the investment project.