It's about Moral Hazard. Suppose that we have a firm who has a risk project S with a loan rate at 5%(in class, it was assumed to be zero) and that the firm will default if its project fails. Also assume that Loan amount is given at a size of L. 

(1)Now compute the value of S in this case with success probability is given p= 1-(S/2).

(2)Then compute the new S if the firm has to pay all loan principle even after the project fails.