The 80% mortgage would finance 0.8 . $76,363.64 ≈ $61,090.91 today.

Event Prob Building Value Mortgage Value Levered Ownership Tornado 20% $20,000 $20,000 $0 Sunshine 80% $100,000 $79,000 a $21,000 Expected Value at Time 1 $84,000 $67,200 b $16,800 Present Value at Time 0 $76,364 $61,091 $15,273 From Time 0 to Time 1, E(˜r) 10% 10% 10%

a. The necessary mortgage promise is (1.10 . $61,091 − 0.2 . $20,000)/0.8 ≈ $79,000.

b. The expected mortgage payoff is 0.2 . $20,000 + 0.8 . $79,000 = $67,200.