You are a commercial loan borrower deciding whether or not to threaten to strategically default on the lender and you have the following information: This is a non-recourse loan The current loan balance = $15,500,000 The foreclosure (deadweight burden) costs to the lender to the lender in foreclosure occurs = $3 million Current market value is uncertain, but there are 2 possibilities:

1. Scenario I: $18 million

2. Scenario II: $16 million

Part A. For each scenario (I and II) calculate the cost/benefit to the lender if you decide to default and the cost/benefit to you (the borrower) if you decide not to default. Then explain why or why not you have decided to default. YOU MUST SHOW ALL CALCULATIONS TO RECEIVE FULL CREDIT!

Part B. Revisit scenario II, now you (the borrower) try to negotiate the loan balance down to $13.5 million and threaten to default if the lender does not do so. How much will you lose/gain if the lender decides not to negotiate and lets you default? YOU MUST SHOW ALL CALCULATIONS TO RECEIVE FULL CREDIT!

Part C. Revisit scenario II again, now you are the lender. What is your financial gain/ loss if you refuse to negotiate and the borrower defaults? What is your financial gain or loss if you negotiate with the borrower and reduce the loan balance to $13.5 million? Explain whether or not you should negotiate? YOU MUST SHOW ALL CALCULATIONS TO RECEIVE FULL CREDIT!