Ginny is endowed with $ 8million and is deciding whether to invest in a restaurant. Assume perfect capital markets with an interest rate of 6%.

Investment Option	Investment (millions)	End of Year 1 CFs (millions)	End of Year 2 CFs (millions)
1	2	1.8	1.8
2	3	4.3	1.0
3	4	5.4	1.4
4	5	5.2	1.6

1. List 4 perfect capital market assumptions.

1.   ______________________________      2.   ______________________________

3.   ______________________________ 4.   _______________________________

2. Which investment option should Ginny choose?

3. Which investment option can be eliminated from consideration? Why?

Ginny is actively pursuing another business venture as a ticket scalper. She estimates that for a $2 million investment in inventory she can resell her tickets for $6 million over the next two years (cash flows realized in exactly two years). Assume the same 6% interest rate.

4. What is the NPV of the Ticket Brokering venture?

5. What is the new value of Ginny’s Corporation?

6. Suppose Ginny does not have the $2 million to start the new venture. Instead, she wants to raise equity capital by issuing 100,000 shares. What price will new investors be willing to pay?

Answer rating: 100% (QA)

Part II i NPV of ticket brokering ... View the full answer