GINNY’s Templates

Q5, & Q 6 a.b.c

GINNY Q5. 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 (cash of $4 million) with a widely-diffuse
group of investors, savers and spenders? How much of the $4 million will the savers
want to invest in the restaurant, and how much will the spenders want to invest (assume
whatever is not invested will be paid out as a dividend to investors).

Will they reach a compromise, and if so what will it be?

NO / YES: both savers and spenders will choose and advice to invest …….. million

NO/YES : Capital markets (efficiently) transfers money through time

NO/YES : Capital markets do not interfere with Investment decisions

NO/YES : Managers do not need to consult shareholders regarding project selection

NO/YES : There is no impact on dividend policy, irrelevant as spenders can sell

shares
GINNY Q 6a) The Virginia Corporation now consists of cash (remaining after the
investment in Ginny’s) and Ginny’s Restaurant. Assume that Virginia is contemplating
another investment, namely to sell smoked hams via the internet. This project will
require a $2.5 million investment and will yield a future cash flow of $3.4 million. Should
she undertake this 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.

Assets Balance Sheet Liability

Cash ……
Ginny’s …… Equity …….
Total …… Total …….

a) What is the current share price after the investment the investment
in Ginny’s

Current share price = …….. /……… = ……...

 GINNY Q6b)The Virginia Corporation now consists of cash (remaining after the
investment in Ginny’s) and Ginny’s Restaurant. Assume that Virginia is contemplating
another investment, namely to sell smoked hams via the internet. This project will
require a $2.5 million investment and will yield a future cash flow of $3.4 million. Should
she undertake this 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.
b) What is the Value after the investment the investment in the Internet business?

Assets Balance Sheet Liability

Cash ……
Ginny’s ……
Internet business * …… Equity …….
Total ……. Total …….

* ….. / …… = ……
 GINNY Q6c)The Virginia Corporation now consists of cash (remaining after the
investment in Ginny’s) and Ginny’s Restaurant. Assume that Virginia is contemplating
another investment, namely to sell smoked hams via the internet. This project will
require a $2.5 million investment and will yield a future cash flow of $3.4 million. Should
she undertake this 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.
c) What is the expected new share price after the new Internet investment is carried
out, reflecting the new NPV ?

Assets Balance Sheet Liability

Cash …… Current share price = …… /…… = …….
Ginny’s ……
Internet business * …… Equity …….
Total ……. Total …….

NPV = ….. – ….. = …… ./ …… shares = ….. per share

NEW share price is = Current share price plus NP per share new business = ……………..
* ….. / …… = ……
Ginnys Retaurant

Template
 Ginny’s Restaurant Q1
Yr 0 (Now) Yr 1
Option 1 (1.0) 1.8 PV1F
PV1F 6% 1.000 ….
PV (1.0) …..
(.. / …..)
NPV …… = ……
Option 2 (2.0) 3.3
PV1F 6% 1.000
PV (2.0)
NPV ……

Option 3 (3.0) 4.4

PV1F 6% 1.000 ……
PV …… ……
NPV ……
Option 4 (4.0) 5.4
PV1F 6% 1.000 …….
PV …… …….
NPV ……
 Ginny’s Restaurant Q2

The optimal investment size is …., since this

is the investment which maximises the NPV
(Net Present Value = Sum of all the Present
Values)

Investment .……

Future CF y1 …… , discounted at ….%

PV ……
NPV …… (…. – …..)
 Ginny’s Restaurant Q3

….., she can spend ….. immediately, even if she

makes the …..investment now.

She can spend …. in cash and borrow ….. against

the future cash flow of the ….. mill. investment.

At the end of the year she has to pay to the Bank

….. and she will have ….. remaining from the Cash
Flow of the Restaurant, which is …..

Loan: ……
Interest … %: …… (….. * ….%)
Total: ……
 Ginny’s Restaurant Q4

If she has no money, she can borrow the ….from

the bank and do the ….. investment.

At the end of the year she has to pay to the Bank

…… and she will have ….. remaining from the
Cash Flow of the Restaurant, which is …..

Loan: ……
Interest ….%:…… (…. x …%)
Total: ……