1. AlexG Inc.’s assets in place have an uncertain value: they are worth either £40 million or £80 million with equal probability. The company plans a new investment which costs £18 million in year 0 (today) and pays off £24 million in year 1. The market beta of this investment is 2. The risk-free interest rate is 5% and the expected return on the market portfolio is 12.5%. The only market imperfection is that AlexG Inc. and the market can have different beliefs about the value of the company’s assets in place.
   Suppose that AlexG Inc. knows that the exact value of its assets in place is £80 million. The market however does not know the exact value and relies on the probability distribution of values described above. How much do existing shareholders of AlexG Inc. gain from the investment if they raise £18 million by selling shares in the equity market?

	a.	£10.3 million.
	b.	-£2.5 million.
	c.	-£2.0 million.
	d.	£6.5 million.
	e.	£2.0 million.
	f.	£1.7 million.
	g.	£6.0 million

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CALCULATION OF AMOUNT THAT ALEX G INC GAIN FROM INVESTMENT COST OF EQU... View the full answer