Question

In: Finance

(A) Pretend you are a private equity analyst with two investment options. Option (1) requires a...

(A) Pretend you are a private equity analyst with two investment options. Option (1) requires a $1,000,000 initial investment (today) in DAT enterprise, a firm that specializes in making shoes that won't catch on fire if you run to fast in them. You expect your investment in DAT will generate $100k in income per year beginning at the end of year 3. You will be able to sell DAT enterprise for $2,500,000 in year 8.

Option (2) requires only a $250,000 initial investment in Husky Corp., a Seattle-based firm that specializes in football jerseys that won't tear if the player is consistently landing on his back. Husky Corp. will generate no cash, but you can resell your investment in Husky Corp. for $2,500,000 in year 10(presumably because the demand for such jersey in Seattle is quite high).

You have $1,000,000 to invest. You cannot borrow or invest on margin. Further, suppose you could earn a 2% return in the money market if you invest in neither option. How do you invest?

(B) How does your analysis change if the rate of return in the money market is 5%? What about 0.25%

Solutions

Expert Solution


Related Solutions

A company is considering two investment options: Option 1: An investment of $45,000 today, and another...
A company is considering two investment options: Option 1: An investment of $45,000 today, and another investment of $15,000 in year 3, with returns of $18,000 in year 2, $7000 in year 3, and $50,000 in year 5. Option 2: An investment of $55,000 today, and another investment of $5000 in year 4, with returns of $15,000 in year 1, $16,000 in year 3, and $60,000 in year 5. Calculate the internal rate of return for each option. Which investment...
You are considering two investment options. In option​ A, you have to invest ​$6,000 now and...
You are considering two investment options. In option​ A, you have to invest ​$6,000 now and ​$1,100 three years from now. In option​ B, you have to invest ​$3,200 ​now,​ $1,300 a year from​ now, and ​$1,000 three years from now. In both​ options, you will receive four annual payments of ​$2,200 each.​ (You will get the first payment a year from​ now.) Which of these options would you choose based on​ (a) the conventional payback​ criterion, and​ (b) the...
You are a business analyst with a big investment bank, and you are evaluating the equity...
You are a business analyst with a big investment bank, and you are evaluating the equity risk, business risk, and financial risk of Abilon's Inc. You went online and found that the industry consensus on Abilon's equity risk is 1.5. You also know that the company's debt-equity ratio is 2. What is Abilon's estimated business and financial risk based on the model: ?E = ? A(1 + D/E)?
An investment analyst prepares the following distribution of the prices of two equity stocks, A and...
An investment analyst prepares the following distribution of the prices of two equity stocks, A and B, she expects to see at the end of the coming financial year in each of five states. The probability that each state might occur has also been estimated and is noted below. The current prices in the market are £45 and £38 per share for A and B respectively. State 1 2 3 4 5 Probability 0.10 0.15 0.25 0.25 0.25 Stock A...
You just won a lottery. There are two payout options for you: Option 1: a lump...
You just won a lottery. There are two payout options for you: Option 1: a lump sum payment of $500,000 today; Option2: a payment of $20,000per year for the next thirty years(starting from next year until the end of the 30th year) If the required return is 5%, then what's the NPV of choosing the first payout option for winning this lottery? Hint: Please regard the(present) value of the second option as opportunity costs in this calculation.
Consider an investment opportunity with an option to grow that requires a $10m investment today. In...
Consider an investment opportunity with an option to grow that requires a $10m investment today. In one year we will find out whether the project is successful or not. The probability that the project will generate $1M per year in perpetuity (starting from one year after the investment is made; that is, starting from year 1) is 50%. Otherwise, the project will generate nothing. You can double the size of the project in year 1 if the original project is...
Net Present Value—Unequal Lives Daisy's Creamery Inc. is considering one of two investment options. Option 1...
Net Present Value—Unequal Lives Daisy's Creamery Inc. is considering one of two investment options. Option 1 is a $75,000 investment in new blending equipment that is expected to produce equal annual cash flows of $19,000 for each of seven years. Option 2 is a $90,000 investment in a new computer system that is expected to produce equal annual cash flows of $27,000 for each of five years. The residual value of the blending equipment at the end of the fifth...
Net Present Value-Unequal Lives Daisy’s Creamery Inc. is considering one of two investment options. Option 1...
Net Present Value-Unequal Lives Daisy’s Creamery Inc. is considering one of two investment options. Option 1 is a $69,000 investment in new blending equipment that is expected to produce equal annual cash flows of $21,000 for each of seven years. Option 2 is a $79,000 investment in a new computer system that is expected to produce equal annual cash flows of $27,000 for each of five years. The residual value of the blending equipment at the end of the fifth...
Your annual salary is $100,000. You are offered two options for a severance package. Option 1...
Your annual salary is $100,000. You are offered two options for a severance package. Option 1 pays you 6 months' salary now. Option 2 pays you and your heirs $6,000 per year forever (first payment at the end of this year.) If you are required return is 11%, which option should you choose? 1. How much is the value for alternative 1? 2. How much is the value of alternative 2?
1. Assume that you are an investment analyst preparing an analysis of an investment opportunity for...
1. Assume that you are an investment analyst preparing an analysis of an investment opportunity for a client. Your client is considering the acquisition of an apartment complex from a developer at the point in time when the apartments are ready for first occupancy. Your have developed the following information. 1) Number of units = 30 2) First year market rent per unit = $475 per month 3) Rent is projected to increase by 6% each year 4) Annual vacancy...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT