Please answer question #4!

There is a $100M property (Property A ) that will be worth either $117M with a probability of 0.4 or $93M with a probability of 0.6 in one year. In this exercise, you will analyze the return to a non-recourse collateralized loan and the levered equity. 1. What is the expected rate of return to Property A ? % (Hint: The amount of investment is $100M.) Expected return =( Total expected value / current value )1=(102.6/100)1=2.6% Debt 2. What is the present value (for the lender) of a $95M, one-year, zerocoupon, riskless loan? The riskless rate of return is 1%. M (Hint: The borrower promises to pay $95M at t=1 and no other payment.) 3. What is the lender's payoff in each state of nature at t=1 for a $95M, one-year, zerocoupon, risky, non-recourse loan (Loan B) that is collaterajized by Property A? (Hint: The borrower promises to pay $95M dollars at t=1, but may strategically default on the loan.) $M If the property value is 117 ; If the property value is 93 4. What is the amount that Loan B's lender will forgive (i.e., the payoff to the borrower's default option) in each state of nature at t=1 ? (Hint: The lender has to forgive the difference between the promised payment and the collateral value.) $M if the property value is 117 ; 5. The present value (i.e., premium) of the borrower's default option is $1.32M. What is the present value of Loan B for the lender? $M