Name of Student: RAVIKUMAR SINGH

Roll no: MM2022231

Reg. No: 231233
Specialization: FINANCE MANAGEMENT
Batch: 2020-2022
Institute: BALAJI INSTITUTE OF MODERN
MANAGEMENT
Semester: I
Subject Name: CORPORATE FINANCE
Assignment No: 2nd
Submission Date: 09/01/2021

Total no. of pages written :09

Q.1
Ans.1.
What is Virginia’s current wealth ?
Ans. The current wealth
Discount Rate Today One year Later
6% $20,00,000 $30,00,000
NPV $48,30,139

How much money can she spend and consume today?

Ans. $20,00,000
How much of the money cans she spend and consume one year from today
if she consumes nothing today?
Ans. $21,20,000.00 $30,00,000 $51,20,000

1) PV=2+3/1.06=2+2.83=4.83
2
FV=2*1.06+3=2.12+3=5.12

2)3*1.06+1.8=4.98
2*1.06+3.3=5.42
1*1.06+4.4 =5.46
0+5.4 =5.4
Invest 3 million in Ginny’s. Her wealth will be 5.46 million after one
year.

3) No, she has to reserve 3 million to invest according to her plan.

4) R1 = (1.8-1)/1=0.8 R2 = (3.3-2)/2=0.65 R3 = (4.4-3)/3= 0.47 R4 =
(5.4-4)/4 = 0.35

Because the max return rate is 0.8 by investing 1 million in Ginny’s,

she should borrow 1 million dollar loan from bank.

5)
6)R = (3.4-2.5)/2.5=0.36 >R4(0.35). Yes, she should undertake
1. Valuation of Virginia’s assets
a. Present value:
PV = $2,000,000 + $3,000,000/(1+0.06)1
= $2,000,000 + $2,830,189
= $4,830,189

b. Future Value (1 year):

FV = 2,000,000(1+0.06)1 + 3,000,000
= 2,120,000 + 3,000,000
= 5,120,000

$1 million investment
PV = $1,800,000/(1+0.06)1 + $3,000,000
= $1,698,113 + $3,000,000
= $4,698,113

d. $2 million investment
PV = $3,300,000/(1+0.06)1 + $2,000,000
= $3,113,208 + $2,000,000
= $5,113,208

e. $ 3 million investment
PV = $4,400,000/(1+0.06)1 + $1,000,000
= $4,150,943 + $1,000,000
= $5,150,943

f. $4 million investment
PV = $5,400,000/(1+0.06)1
= $5,094,340

Virginia’s optimal investment in the restaurant is $3 million, which

give her a total of $5,150,943 at the end of year 1. This is
approximately a 29% increase in her wealth.
3. PV of investment with $2.8m borrowed

FV = Restaurant Future Cash flows –

[Principle(1+0.06)]
= $4,400,000 – [$2,800,000(1.06)]
= $4,400,000 - $2,968,000
= $1,432,000 PV
= $1,432,000/1.06
= $1,350,943

Assuming that Virginia can borrow the balance of the $3 million

investment at a 6% interest rate, she should make the investment
regardless.

PV of investment with $3m borrowed

FV = Restaurant Future Cash flows – [Principle(1+0.06)]

= $4,400,000 – [$3,000,000(1.06)]
= $4,400,000 - $3,180,000
= $1,220,000
= $1,220,000/1.06 PV
= $1,150,943

Yes, she should still make the investment as it will net her $1,150,000.
 Q.2. How much of the $4 million should Virginia invest in the
restaurant?

Discount rate Remaining Investment Future cash

wealth (today) flow (end of
year)
6%
NPV $46,41,509 $30,00,000 $10,00,000 $18,00,000
NPV $50,00,000 $20,00,000 $20,00,000 $33,00,000
NPV $49,81,132 $10,00,000 $30,00,000 $44,00,000
NPV $48,67,925 $0 $40,00,000 $54,00,000

What happens to Virginia’s wealth when she makes the investment in

Ginny’s Restaurant?

Ans. $ 4 million grows to $5m if she invest $2m in Ginny's restaurant. In

other words Virginia wealth grows $1million.
 Q.3. Suppose that Virginia has a strong preference for current versus
future consumption, and would like to consume at least $3.8 million
immediately. Is this consumption possible in light of the planned
investment in Ginny's restaurant?

Ans. Yes it is possible. See the following NPV. All senario become positive
NPVs.

Discount Own Finance Investment Future cash Interest

rate money (today) (today) flow (end cost (end
(today) of year) of year)

6%
NPV $6,52,830 $2,00,000 $8,00,000 $10,00,000 $18,00,000 $48,000

NPV $10,11,321 $2,00,000 $18,00,000 $20,000,00 $33,00,000 1,08,000

NPV $9,92,453 $2,00,000 $28,00,000 $30,00,000 $44,00,000 $1,68,000

NPV $8,79,245 $2,00,000 $38,00,000 $40,00,000 $54,00,000 $2,28,000

 Q.4 assume that Virginia does not have the $4 million endowment to
begin with , but still has the necessary skills to develop & operate
Ginny's restaurant. Should she still make the investment in the
restaurant , & if so ,how much? Assume that the only source of
financing is a bank loan.

Ans. Yes virginia should finance $2 m from a bank to invest in ginny’s

restaurant.

Discount Own Finance Investment Future Interest

rate money (today) (today) cash flow cost (end
(today) (end of of year)
year)
6%

NPV $6,41,509 0 $10,00,000 $10,00,000 $18,00,000 $60,000

NPV $10,00,000 0 $20,00,000 $20,00,000 $33,00,000 $1,20,000

NPV $9,81,132 0 $30,00,000 $30,00,000 $44,00,000 $1,80,000

NPV $8,67,925 0 $40,00,000 $40,00,000 $54,00,000 $2,40,000

 Q.5 Individuals are of two types, savers and spenders. While all
individuals prefer current consumption to future consumption all
other things equal, spenders have a relatively higher preference for
current consumption. What if Virginia shares her ownership interest
in the Virginia corporation with a widely diffuse group of investors
savers and spenders ? How much of the $4 million will the saver want
to invest in the restaurant, and how much will the spenders want to
invest. Will they reach a compromise, and if so what will it be ?

Ans. Saver wants to invest $3,760,00 and keep $240,000 as dividend.

Discount Own Finance Investment Future Interest

rate money (today) (today) cash flow cost (end
(today) (end of of year)
year)
6%

NPV $6,98,113 $37,60,000 $0 $10,00,000 $18,00,000 $0

NPV $11,13,208 $37,60,000 $0 $20,00,000 $33,00,000 $0

NPV $11,50,943 $37,60,000 $0 $30,00,000 $44,00,000 $0

NPV $10,80,755 $37,60,000 $2,40,000 $40,00,000 $54,00,000 $14,400

Discount Own Finance Investment Future Interest

rate money (today) (today) cash flow cost (end
(today) (end of of year)
year)
6%

NPV $6,98,113 $10,00,000 $0 $10,00,000 $18,00,000 $0

NPV $11,13,208 $20,00,000 $0 $20,00,000 $33,00,000 $0

NPV $11,50,943 $30,00,000 $0 $30,00,000 $44,00,000 $0

NPV $10,94,340 $40,00,000 $0 $40,00,000 $54,00,000 $0

Q.6 The Virginia corporation now consist of cash and Ginny's
restaurant. Assume that Virginia is contemplating another
investment , namely to sell smoked hams via internet. This project
will require a $2.5 million investment? Assume that she does not
want to use internal cash to finance the investment, nor does she
want to use debt financing. There are currently 200,000 shares
outstanding in the Virginia corporation.

Discount today One year

rate later
6%
Investment ($25,00,000)
CF $34,00,000
Dividend ($1,50,000)
($25,00,000) $32,50,000
NPV $5,66,038
Shares o/s Price per Dividend Dividends
Share per Share
200000 $12.50 $0.75 $1,50,000

Virginia should undertake this investment as it will generate $566,038

positive NPV even after giving 6% of stock price as a dividend