(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%

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jeff jeffy answered 1 year ago

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