Sep 19, 2017


This paper concentrates on the primary theme of (RETAINED-EARNINGS BENEFIT). AN ENTREPRENEUR HAS AT DATE 1 A PROJECT OF FIXED SIZE WITH… in which you have to explain and evaluate its intricate aspects in detail. In addition to this, this paper has been reviewed and purchased by most of the students hence; it has been rated 4.8 points on the scale of 5 points. Besides, the price of this paper starts from £ 40. For more details and full access to the paper, please refer to the site.

(retained-earnings benefit). An entrepreneur has at date 1 a project of fixed size with characteristics {I1, R1, p1 H, p1 L , B1} (see Section 3.2). This entrepreneur will at date 2 have a different fixed size project with characteristics {I2, R2, p2 H, p2 L , B2}, which will then require new financing. So, we are considering only a short-term loan for the first project. Retained earnings from the first project can, however, be used to defray part of the investment cost of the second project. Assume that all the characteristics of the second project are known at date 1 except B2, which is distributed on [B2, B¯2] according to the cumulative distribution F(B2). Assume for simplicity that B2 > ∆p2(p2 HR2 − I2)/p0 H. The characteristics of the second project become common knowledge at the beginning of date 2. (i) Compute the shadow value of retained earnings. (Hint: what is the entrepreneur’s gross utility in period 2?) (ii) Show that it is possible that the first project is funded even though it would not be funded if the second project did not exist and even though the entrepreneur cannot pledge at date 1 income resulting from the second project.

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