Question $2$

A entrepreneur without personal funds is in search of funding for a fresh venture. The

project needs an investment of $3\mathrm{.}4$ million and offers a $50\%$ return in case of success,

while yielding no return in case of failure. In the market, there are two categories of

entrepreneurs: those considered $$good$"$ and those considered $$bad$."$ Good entrepreneurs

have a $70\%$ success rate, while bad entrepreneurs have a $30\%$ success rate. The market

does not know the true probability of success. The initial probability in the market of an

entrepreneur being of the $$good$$ type is $0\mathrm{.}4.$

$1$

i What contractual terms would the good borrower offer to a risk$-$neutral investor in

the case perfect information?

ii Under the case of asymmetric information, will a risk$-$neutral investor be willing to

lend the required funds? If so$,$ what terms will be offered by the entrepreneur?Question $2$

A entrepreneur without personal funds is in search of funding for a fresh venture. The

project needs an investment of $3\mathrm{.}4$ million and offers a $50\%$ return in case of success,

while yielding no return in case of failure. In the market, there are two categories of

entrepreneurs: those considered "good" and those considered "bad.$\text{'}$ Good entrepreneurs

have a $70\%$ success rate, while bad entrepreneurs have a $30\%$ success rate. The market

does not know the true probability of success. The initial probability in the market of an

entrepreneur being of the "good" type is $0\mathrm{.}4.$

i What contractual terms would the good borrower offer to a risk$-$neutral investor in

the case perfect information?

ii Under the case of asymmetric information, will a risk$-$neutral investor be willing to

lend the required funds? If so$,$ what terms will be offered by the entrepreneur?