Question Details

(Solved) Peter is considering investing in Paxology, a new business venture owned by Maria.


Peter is considering investing in Paxology, a new business venture owned by Maria. Her business plan shows that if the project is successful, Paxology is expected to generate the following cash flows for its investors:

Year Cash Flow (£)

1 0

2 230,000

3 450,000

4 1,800,000

The cash flow in the fourth year includes cash flows that would be receivable from selling the business to a third party at that time. You initially concluded that the cash flow estimates provided by Maria were reasonable. Peter is looking for seed capital of £200,000 to undertake the venture. Paxology is expected to be viable, if it is successful after the initial investment. Required:

a) Using 40 percent and 100 percent hurdle rates, estimate the present value of Paxology and the fraction of equity you would need to cover your investment.

b) Peter now decides to undertake due diligence as any investment in Paxology will be substantial. After due diligence work, Peter concludes that the probability that Paxology will be successful through Year 2 is about 70 percent, through Year 3 is about 50 percent and through Year 4 is about 30 percent. If Paxology fails, it will not return any cash to its investors. Determine the discount rates of the expected cash flows that would yield the same ownership fraction as the 40 percent hurdle rate in part (a).

c) Suppose Peter can establish that for each of the annual cash flows of Paxology described in part (a), the correlation between project cash flows and the market is 25 percent. He also determined that the market risk premium is 6 percent, the risk free interest rate is 3.5 percent, the standard deviation of market returns is 15 percent for one year, 24 percent for two years, 32 percent for three years, and 39 percent for four years. Using the certainty equivalent form of the Capital Asset Pricing Model, find the present value of the project.

 


Solution details:
STATUS
Answered
QUALITY
Approved
ANSWER RATING

This question was answered on: Sep 05, 2019

PRICE: $15

Solution~000200227524.zip (25.37 KB)

Buy this answer for only: $15

This attachment is locked

We have a ready expert answer for this paper which you can use for in-depth understanding, research editing or paraphrasing. You can buy it or order for a fresh, original and plagiarism-free copy from our tutoring website www.aceyourhomework.com (Deadline assured. Flexible pricing. TurnItIn Report provided)

Pay using PayPal (No PayPal account Required) or your credit card . All your purchases are securely protected by .
SiteLock

About this Question

STATUS

Answered

QUALITY

Approved

DATE ANSWERED

Sep 05, 2019

EXPERT

Tutor

ANSWER RATING

GET INSTANT HELP/h4>

We have top-notch tutors who can do your essay/homework for you at a reasonable cost and then you can simply use that essay as a template to build your own arguments.

You can also use these solutions:

  • As a reference for in-depth understanding of the subject.
  • As a source of ideas / reasoning for your own research (if properly referenced)
  • For editing and paraphrasing (check your institution's definition of plagiarism and recommended paraphrase).
This we believe is a better way of understanding a problem and makes use of the efficiency of time of the student.

NEW ASSIGNMENT HELP?

Order New Solution. Quick Turnaround

Click on the button below in order to Order for a New, Original and High-Quality Essay Solutions. New orders are original solutions and precise to your writing instruction requirements. Place a New Order using the button below.

WE GUARANTEE, THAT YOUR PAPER WILL BE WRITTEN FROM SCRATCH AND WITHIN YOUR SET DEADLINE.

Order Now