Question: A venture capitalist (VC) is considering investing in a startup firm. The startup has borrowed from a bank, and it owes $15m in one year.

  1. A venture capitalist (VC) is considering investing in a startup firm. The startup has borrowed from a bank, and it owes $15m in one year. The VC estimates that the firm's assets are worth $14.5 million right now, and she feels that the firm's asset value has an annual volatility of 22%. The startup will have earnings in one year of about $500,000. If the startup's founders are willing to sell the VC 40% of the firm's equity for a price of $400,000, should she take the deal or leave it? Assume that the risk-free rate is 5% per year.

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