Your friend has successfully utilized AI to build genome-based medicine (akin to the Deep Genomics), and she
Question:
Your friend has successfully utilized AI to build genome-based medicine (akin to the Deep Genomics), and she has recently gotten all the necessary approvals for these. She plans to incorporate, she does not have her own funds, and she requires $5 million in start-up funding (for the initial production, marketing, distribution, etc.). She expects annual profits of $1.5 million in perpetuity, starting in one year; the unlevered cost of equity for this project is 10%.
Assume perfect capital markets [in particular: no taxes] in the sense of the Modigliani-Miller theorems. Cite the relevant results from lecture.
(1) Verify that this firm is worth investing into by computing the project's NPV.
(2) Your friend asks for your advice on the optimal choice of financing for her project. What is your recommendation and why? Cite the relevant results from lecture. [1-2 sentences.]
(3) Your advice in (2) notwithstanding, your friend chose full equity financing. She plans to issue 10 million shares;she will sell 9 million to her investors and keep 1 million to herself.
a. At which price should she sell the shares (assume that her goal is to maximize her profits)? b. How much money will she raise?
(4) Some of your friends' potential investors are reluctant to invest in an all-equity firm. Their chief complaint is that a combination of debt and equity-financing typically yields higher expected returns to equity-holders.
Help your friend address these investors' concerns. You answer must, in particular, (i) address whether equity investors will indeed earn higher returns under a different financing arrangement, and (ii) explain whether and how your friend can convince these investors to invest into her firm.