1. Virginia currently has assets worth $4.83 million. She can spend $2 million today and have $5.12 million one year from today if she consumes nothing now. 2. The optimal investment for Virginia in Ginny's Restaurant is $3 million, which will increase her wealth to $5.15 million, a 29% increase. 3. Virginia can borrow money to allow for current consumption of $3.8 million while still investing $3 million in the restaurant, as all scenarios remain positive NPV.

1. Ginny's Restaurant Case
Study
By
Ashish barapatre (13034)
Bhavik kothari (13035)
Aditya kapoor (13031)
Ankur gupta (13032)

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. 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. • 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. • 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. • . $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. • 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. • 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. • . 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. 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. 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. 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. 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. 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. (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. 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. 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.