11-4-09 - Economics 448 Class Notes 11/4/09 ASSIGNMENT FOR...

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ASSIGNMENT FOR PRESENTATIONS: You must write 1-2 pages on the question that is given to the class for each in- class presentation. There are 8 presentations, you must choose FOUR (4) of the 8 to write a response to. Do we choose the Equity or Bond market to raise venture capital? BOTH There are agency problems with equity and debts (bond) markets Two projects to choose to invest in: Project A: If I invest in this project, I am guaranteed to earn $110 by the end of the year Project B: If I invest in this project, I have a 10% chance of earning $120 and a 90% chance of earning $0 (nothing You need to make a $100 investment to invest in EITHER project So, 10% rate of return for project A 20% rate of return for project B 10% of the time o 90% of the time I am going to make a negative expected rate of return If you are an inside equity owner: Project A is really a better choice. ENTIRE VENTURE IS FUNDED THROUGH DEBT: Now, what if you get a loan of $100? The lender is promised a fixed rate of return. The interest on the loan is 10%
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11-4-09 - Economics 448 Class Notes 11/4/09 ASSIGNMENT FOR...

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