You are a bank loan officer, and an entrepreneur has approached you for a loan to expand his business. The entrepreneur has an existing business with a value of 5m if it is successful, but there is a chance of failure. If the business fails, it is worthless. The expansion investment is a marketing investment aiming at increasing the efficiency of the companys marketing efforts, thereby increasing the businesss probability of success. You think the expansion investment makes sense, and you believe that for an investment of 210,000, the probability of success can be increased by 5%. You are, however, not entirely sure about the quality of the existing business. If the entrepreneur is skillful, you think the success probability currently is 80% which will then increase to 85% with the new investment. However, if the entrepreneur is not skillful, you think the success probability is only 50%, which will then increase to 55% with the new investment. The entrepreneur knows his own type, but is unable to credibly communicate his type to the loan officer. You need to consider whether a loan should be granted and, if so, under what terms. To work this out, you should assume risk neutrality and a risk-free interest rate of zero. Also, assume that the loan is a zero-coupon bond with a face value of F, so that the only factor under consideration is how big the face value should be. You should assume that your prior beliefs about the skill of the entrepreneur is that he is equally likely to be skillful as not. a. What is the net present value of the expansion investment? (10 marks) b. Assume the entrepreneur has no cash to put into the expansion investment and needs to raise all funds from the bank. What are the financing terms you are willing to offer the entrepreneur? (20 marks) c. Now assume the entrepreneur can raise 50,000 of his own money towards the expansion investment. Would this make a difference to your answer in b?