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%,

3. What is the value of the equity of Baker? A) 950 B) 1150 C) 1000 D) 1100 E) None of these answers