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Mr. Cool has invented a new sunscreen. In warm years demand is high and profits are 1 million dollars, in cool years profits are 500,000
Mr. Cool has invented a new sunscreen. In warm years demand is high and profits are 1 million dollars, in cool years profits are 500,000 dollars. Temperature is IID and the likelihood of a warm year is 0.5 . Everyone knows that after 10 vears, a competitor will come into the market and profits will be zero. The riskless interest rate is 3% per year. 1A. 2 pt. What is the NPV of the sunscreen invention? 1.B 2pts. Suppose Mr Cool decides to set up the l'Oree cosmetic firm to produce the sunscreen and to do so he needs to raise three million dollars from a risk neutral investor (whose alternative investment in a riskless bond). If he issues stock what share of the firm does he have to give to the investor? 1.C 2pts. Suppose MrCool issues bonds at an interest rate of 4% to the investor instead, what is the price of those bonds so how many does he issue to raise $3,000,000. 1.D 2pts Show that MC Cool's wealth is he same whether he issues stock or bonds
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