TASK 3

Suppose you are considering investing in a new company called B. This company generates an uncertain future cash flow. You have calculated that the company is expected to have a profit of 1,000 each year which is paid out in dividends. Investing in company B costs 10,000 today. There is an existing company that is almost exactly the same as B. The only difference is that B is financed only with equity, while the existing company is financed with equal amounts of equity and debt. The beta value of the equity in this existing company is 1. Is it profitable to invest in company B? Explain what assessments you make in your analysis