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

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.   _______________________________

  1. Which investment option should Ginny choose?
  1. 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.

  1. What is the NPV of the Ticket Brokering venture?
  1. What is the new value of Ginny’s Corporation?
  1. 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?

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