Question

Ginny is endowed with $10 million and is deciding whether to invest in a restaurant. Assume perfect capital markets with an interest rate of 6%.

Investment Option	Investment (millions)	End of Year CFs (millions)
1	1	1.8
2	2	3.3
3	3	4.4
4	4	5.4

2. Which investment option should Ginny choose?

Ginny is actively pursuing another business venture as a ticket scalper. She estimates that for a $2 million investment in inventory she can resell her tickets for $6 million over the next year (cash flows realized in exactly one year).  Assume the same 6% interest rate.

3. What is the NPV of the Ticket Brokering venture?
4. What is the new value of Ginny’s Corporation?
5. Suppose Ginny does not want to use her own $2 million to start the new venture. Instead, she wants to raise equity capital by issuing 100,000 new shares. What price will new investors be willing to pay?
6. How many shares will need to be sold to outside investors?
7. How will your answer differ if Ginny is not guaranteed to resell the tickets for $6 million?
8. According to Ginny’s prospectus, cash flows from ticket sales (net of expenses) are expected to follow the following distribution:

Prob	Outcome
0.2	$5M
0.5	$3M
0.3	-$2M

What is the new value of Ginny’s Corporation?

9. What price will new investors be willing to pay for Ginny’s shares?

Please only answer Q6, Q7, Q8, Q9 four questions. Thanks.

Answer 1

Ans Evaluation of Investment Proposal
Option	Investment Amt	Cash Flows	Payback Period
1	1	1.8	0.56
2	2	3.3	0.61
3	3	4.4	0.68
4	4	5.4	0.74
Payback Period = Initial Investment/ Cash Inflow
Ginny should choose Investment Option 1 which is having least payback period.
Ans-2
If Ginny considers 2nd option then she will get 6 million over next year as Cash Inflows., so payback period will get change
Net Inflows	6
Investments	2 millions
Payback Period	1/3	0.333333
So payback period will be shorter in case of 2nd option if cash flows will increased. Ginni Should consider 2nd option now.
Ans Calculation of NPV
Yr	CF	Disc Factor	Amount
1	6	0.943396	5.66
		Total	5.66
Less	Initial Investment	2.00
	NPV		3.66