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A
company with $200,000 initial endowment has the following investment
opportuni
A
company with $200,000 initial endowment has the following investment
opportunities available:
Project
I1 X2
1
$150,000 $180,000
2
$125,000 $140,000
3
$160,000 $175,000
4
$55,000 $70,000
Assuming perfect certainty, perfect capital
markets, rational investors, a two-period world, and a
market rate of 15%, answer the following
questions:
a. If the firm applies capital rationing such
that it does not invest more than its initial endowment:
i. Which proposals should the firm undertake and
why?
ii. What is the value of the firm after
investing?
iii. If the firm pays a period 1 dividend of
$40,000 and invests surplus period 1 funds in the
market, how does the change in dividend policy
affect firm value?
b. If there is no capital rationing such that
the firm raises additional funds for investment:
i. Which projects should the firm undertake and
why?
ii. What is the value of the firm after
investing?
iii. If the firm pays a period 1 dividend of
$95,000 by raising additional funds from the market,
what is the value of the firm after changing its
financing policy
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