Suppose that an entrepreneur applies for a $500,000 loan to your bank to take a one-year project costing $1 million as described below. The required rate of return on the debt capital is 10% per year, while cost of equity capital is 20% per year. The WACC for the project is 15%. There are no taxes. The entrepreneur will provide $500,000 of equity capital up front to take the project. The maximum interest rate you can charge is 20%. Assume that all other covenants are satisfied. Is this a good project from the entrepreneurs perspective? Is this a good project from the banks perspective? Show all work.

Good State (50%)? Bad state (50%)

Firm value? $3 million? $300,000

At maturity