Ginny’s Restaurant: An Introduction to Capital Investment Valuation

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Presentation transcript:

Ginny’s Restaurant: An Introduction to Capital Investment Valuation EMM Capstone Course Fall 2009

A Few Comments 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.”

A Few More… Question #1: Virginia can borrow against the future cash flow of $3 million discounted at 6%. Questions #2: Compare the investment alternatives and select the investment that maximizes Virginia’s wealth.

And More… Question #3: Virginia can “have her cake and eat it, too!” She wants to consume and invest using the capital markets and the future cash flows available to her. Question #4: Virginia is able to convince someone to lend her funds to open and operate the restaurant based on its future cash flows.

And finally. Question #5: Virginia and her partners (new investors) want to maximize their wealth by investing in the restaurant. Question #6: Virginia can take advantage of new investment opportunities by issuing additional equity to new investors. Be prepared in class to discuss your solution to each question as well as the key TVM concepts in the mini-case.