Jessica needs 800$ to start a project with the following potential returns in one year: 1400$ in case of strong economy; 900$ in case of weak economy, 50% probability for strong, 50% probability for weak. Jessica considers two mutually exclusive financing offers: Solution A: Baker offers to be the only and 100% owner shareholder (only equity, no debt); Solution B: Elizabeth and Delville have joined forces; their offer is equity plus debt: Elisabeth will be the shareholder and Delville will lend the money, actually he will lend 500$ at risk free interest rate, which is 5%. Equity will represent 50% of the total enterprise value and debt 50%.

The risk premium, in other words the rate of return (excluding the risk free rate) required by Baker in order to compensate for the uncertainty of the returns, is 10%,

4. Taking into consideration the payments due to Delville in solution B, and assuming a levered equity value of 500 for Elisabeth, What is the return sensitivity for equity holder Baker or Elisabeth, i.e the extent of the range going from worst scenario to best case scenario, in terms of percentage, in solution A and B, A) 60%; 100% B) 50%; 100% C) 50%; 80% D) 40%; 80% E) None of these answers