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Ginny's restaurant case study fm

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Ginny's restaurant case study fm

  1. 1. Ginny's Restaurant Case Study By Ashish barapatre (13034) Bhavik kothari (13035) Aditya kapoor (13031) Ankur gupta (13032)
  2. 2. INTRODUCTION • Virginia lives in a “perfect” world: No transaction costs No taxes Investors and lenders have same info All future cash flows are certain Discount rate is risk free (6%) Finite time horizon of one year then Virginia returns to the “real world.”
  3. 3. Question 1 What is Virginia's current wealth (equivalently, what is the present value of her assets)? Discount rate One year later 6% NPV Today $20,00,000 $30,00,000 $48,30,189 How much money can she spend and consume today? $20,00,000 How much of the money cans she spend and consume one year from today if she consumes nothing today? $21,20,000.00 $30,00,000 $51,20,000
  4. 4. • 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 i
  5. 5. • 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
  6. 6. • . $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
  7. 7. • 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.
  8. 8. • 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.
  9. 9. • . 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.
  10. 10. Question 2 How much of the $4 million should Virginia invest in the restaurant? Discount rate Remaining wealth Investment (today) Future cash 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
  11. 11. What happens to Virginia's wealth when she makes the investment in Ginny's restaurant? • $ 4 million grows to $5m if she invest $2m in Ginny's restaurant. In other words Virginia wealth grows $1million.
  12. 12. Question 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 ? • Yes it is possible. See the following NPV. All senarios become positive NPVs. Discount rate Own money (today) Finance (today) Investme nt (today) Future cash flow (end of year) Interest cost (end of year) 6% NPV $6,52,830 $2,00,000 $8,00,000 $10,00,00 0 $18,00,00 0 $48,000 NPV $10,11,32 1 $2,00,000 $18,00,00 0 $20,00,00 0 $33,00,00 0 $1,08,000 NPV $9,92,453 $2,00,000 $28,00,00 0 $30,00,00 0 $44,00,00 0 $1,68,000 NPV $8,79,245 $2,00,000 $38,00,00 0 $40,00,00 0 $54,00,00 0 $2,28,000
  13. 13. Question 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. • Yes virginia should finance $2 m from a bank to invest in ginny’s resturant Discount rate Own money (today) Finance (today) Investme nt (today) Future cash flow (end of year) Interest cost (end of year) 6% NPV $6,41,509 0 $10,00,00 0 $10,00,00 0 $18,00,00 0 $60,000 NPV $10,00,00 0 0 $20,00,00 0 $20,00,00 0 $33,00,00 0 $1,20,000 NPV $9,81,132 0 $30,00,00 0 $30,00,00 0 $44,00,00 0 $1,80,000 NPV $8,67,925 0 $40,00,00 0 $40,00,00 0 $54,00,00 0 $2,40,000
  14. 14. Question 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 ? • Saver wants to invest $3,760,00 and keep $240,000 as dividend.
  15. 15. (TODAY) (TODAY) FLOW (END OF YEAR) (END OF YEAR) 6% NPV $6,98,113 $37,60,OO O $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,OO O $0 $30,00,000 $44,00,000 $0 NPV $10,80,755 $37,60,OO O $2,40,000 $40,00,000 $54,00,000 $14,400 DISCOUNT RATE OWN MONEY (TODAY) FINANCE (TODAY) INVESTME NT (TODAY) FUTURE CASH FLOW (END OF YEAR) INTEREST COST (END OF 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
  16. 16. Question 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.
  17. 17. Discount rate Today One year later 6% Investment ($25,00,000) CF $34,00,000 Dividend ($1,50,000) ($25,00,000) NPV $32,50,000 Price per share Dividend per share $5,66,038 Shares o/s 200000 $12.50 $0.75 dividends $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.

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