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Suppose you completely own a firm whose existing project will $2M each year for the next 3 years and will then be worthless. A new
Suppose you completely own a firm whose existing project will $2M each year for the next 3 years and will then be worthless. A new project is currently available that will generate $3M each year for the next 3 years. You need to raise $5M to start this project. Assume that the new project is public information and the market is efficient.
- a)What percentage of the firm would you have to sell to an investor to raise this $5M? Assume a zero discount rate.
- b)Suppose the manager distributes all cash inflows in the form of dividends. How much does the new investor receive per year?
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