Q$.3$ Question $3$

Pushpa Raj is a coolie who works to smuggle red sanders, a rare wood that only grows in the Seshachalam Hills of the Chittoor district in Andhra

Pradesh. When DSP Govindappa raids them in the forest, Pushpa hides and recovers the stock, thereby gaining the trust of his employer Konda Reddy.

With his novel ideas to smuggle the red sanders, he quickly rises through the ranks and becomes Konda Reddy's partner in the business.

Further he kills Konda Reddy and with his intelligence, becomes a key member in the syndicate of Red wood smugglers. Puspha is a person who always

wants to grow one step ahead in his business. Since he is a Don in the Red Wood Business, Pushpa is contemplating to get into sandalwood smuggling

business.

For Pushpa, to get into Sandalwood smuggling business, he has to invest Rs$.10,00,000$ to obtain membership in Sandal wood syndicate. The syndicate

would allot a few acres of land in which Pushpa can use to smuggle sandalwood.

This would generate a revenue as follows

The operating expenses are $50\%$ of the revenue, which includes the wages to the coolie and commission to the policemen near the check post and the

syndicate members. Puspha expects the tax to be at $30\%.$ After $4$ years the cash flow would grow $5\%$ indefinitely.

The unlevered beta of the Redwood business is $2\mathrm{.}75$ and sandalwood business is $1\mathrm{.}25.$ To raise the financing of Rs$.10,00,000$ pushpa is trying raise

money through crowd financing among his village people.

Assume the risk free rate is $4\%$ and market risk premium is $8\%$ and credit default spread for bonds is $5\%.$

You are asked to advise puspha on whether he should consider investing in the sandalwood business or not?