Question
4) Consider a bright but penniless entrepreneur living in a 5 period perfect capital market under certainty. The market rate of interest is 10% or
4) Consider a bright but penniless entrepreneur living in a 5 period perfect capital market under certainty. The market rate of interest is 10% or r=0.1 | |||||||||||||||
S/he has a project that requires an investment of $250 at t=1 with the following payoff profile in the future |
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t=2 | t=3 | t=4 | t=5 |
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110 | 121 | 133,1 | 146,41 |
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a) What is the market value of this project? |
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b) Is this a worthwile project? (Hint: when $250 is invested in this market at the going 10% interest it generates the following payments: |
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t=2 | t=3 | t=4 | t=5 |
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25 | 25 | 25 | 275 | 250 |
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c) If the entrepreneur wants to finance this project how much will s/he have to borrow? |
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d) If the entrepreneur wants to finance this project by issuing 100 shares, what will be the price of 1 share? |
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d) If the entrepreneur wants to finance this project by issuing 100 shares, how many shares will s/he sell and how many will s/he keep? |
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