PROBLEM 5. RISK SHIFTING (25 POINTS) Consider an entrepreneur has the option to choose one of two possible projects. Project A pays either $20 (in bad state) or S30 (in good state) in a year. Project B pays S0 or $40 in a year. Both states of the world are equally likely. Each project requires investment in the amount of SX today. Entrepreneur doesn't not have his own money. Therefore, he will be able to choose the project after he raises money. Assume the discount rate is zero, all agents are risk neutral and there are no taxes or bankruptcy costs. Also assume limited liability of the entrepreneur. Question 5.1. For this question only assume that X-10. Compare the projects via NPV (3 points) Question 5.2. Calculate payoffs of the entrepreneur for each of the project, given that he will finance the project by issuing Debt. What are the corresponding payoffs for creditors? Provide graphical illustration or analytical explanation. Note: you are expected to calculate payofts as a function of X. (5 points) Question 5.3. What are the values of X that result a risk-shifting behavior of the entrepreneur? Show this on your graph or provide analytical explanation. (5 points) Question 5.4. Now assume that the entrepreneur is personally liable for all business debts. Calculate payoffs of the entrepreneur and creditors for each of the project. What are the values of X that result a risk-shifting behavior of the entrepreneur? (4 points) Question 5.5. Now assume that the project is financed by outside equity. Calculate payoffs of the entrepreneur and outside equity holders for each of the project. What are the values of X that result a risk-shifting behavior of the entrepreneur? (4 points) Question 5.6. Briefly discuss the risk-shifting (asset substitution) problem in the context of the above calculation. (4 points)