Ginnys Restaurant Problem

Ginny is endowed with $10 million and is deciding whether to invest in a restaurant. Assume perfect capital markets with an interest rate of 6%.

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 year (cash flows realized in exactly one year). Assume the same 6% interest rate.

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

2.How many shares will need to be sold to outside investors?

3.How will your answer differ if Ginny is not guaranteed to resell the tickets for $6 million?

(ix) According to Ginnys prospectus, cash flows from ticket sales (net of expenses) are expected to follow the following distribution:

Prob	Outcome
0.2	$5M
0.5	$3M
0.3	-$2M

What is the new value of Ginnys Corporation?

(x) What price will new investors be willing to pay for Ginnys shares?