Suppose our entrepreneur wants to finance the project mostly with debt and the rest with equity (=own funds). To get some debt s/he makes the following offer to the other market participants at t=1: Whatever the state of the economy next period I will pay $950 to the person who loans me money now.With the loan thus obtained, the rest will have to come from own funds. Answer the following questions: ( Strong=1400 , Weak=900 ) ( Rf = 0,05 )

a) what is the maximum amount a creditor who loans money can receive if the economy does poorly? b) what is the maximum amount a creditor who loans money can receive if the economy does well? c) Are the two components of the income stream equal? d) Can we discount the income stream above at the risk free rate of 5%? (recall: the risk free rate is the one which is appropriate for income streams without any variability)