Q3) Consider a bright entrepreneur living in a Perfect Capital Market (PCM) under certainty with only two time periods where r=10% or 0.1.
S/he does not have any initial material wealth but has a brilliant project which consists of generating $55,000 in t=2 by investing $30,000 during t=1
to make a better mousetrap. Our entrepreneur wants to finance the project by selling shares in the capital market. (V= value of the firm for this entrepreneur;
X=net earnings, I=investment expenditures, d=dividend per share, N=number of shares).
HINT: note that the Market Value of this project at t=1 equals $55000/1.1 = $50,000
Answer the following questions:
a) Is this a "good" project? Explain.
b) Can s/he finance this project? How?
c) Suppose the entrepreneur issues 50000 shares. What will be the price of 1 share?
d) How many shares will s/he sell and how many will s/he keep?