Will the small investor lend directly to the firm

Assignment Help Financial Management

Reference no: EM131515129

Consider a firm who needs $10m to initiate a project. The payout of this project is $15m with probability 90% and $10m with probability 10% at the end of two years. Suppose that there are 1000 small investors each with $10,000 to lend. If the project is initiated, only the firm (borrower) knows the result of the project whiles the lenders can not see the results. Hence the lenders would need to monitor the borrower; otherwise the borrower would always report minimum result and just pay back $10,000 to each investor regardless of the outcome of the project. However, as long as one of the lenders pay $1,200 monitor fee to get the information on the results of the project, the information will be known to everyone and the firm will pay $15,000 to each investor if the project succeeds and $10,000 if the project fails. Assume all the investor have an extra $1,200.

a) Suppose the project is the only investment opportunity for the small investors. Will the small investor lend directly to the firm? Will the small investor pay the monitor fee? Why or Why not? (Assume each investor knows that there are many other small investors with $10,000 to lend, but each investor lives in an isolated island and cannot coordinate with other investors, he or she can only communicate with the firm)

b) Will the project be funded if 1000 small investors can form a credit union? If yes, what is rate of return on the investment?

Reference no: EM131515129

Questions Cloud

Dollar weighted and time weighted rates of return : If the dollar weighted and time weighted rates of return were the same, what is the rate of return?

What is the payback period for each project : What is the IRR for each project? What is the NPV for each project? What is the payback period for each project?

Find the velocity of the undisturbed stream : A sink of strength 20 m2 s-1 is situated 3 m upstream of a source of 40 m2 s-1 in a uniform irrotational stream. It is found that, at a point 2.5 m equidistant.

The project will generate cash flows : The project will generate cash flows of $2 million per year for the life of the project.

Will the small investor lend directly to the firm : Will the small investor lend directly to the firm? Will the small investor pay the monitor fee? Why or Why not?

Determine the stream function for a two-dimensional source : Derive the expression giving the stream function for irrotational flow of an incompressible fluid past a circular cylinder of infinite span.

What was total real return on investment : If the inflation rate was 3.4 percent over the past year, what was your total real return on investment?

Derive the irrotational flow formula : The undisturbed static pressure in the fluid is and ? is the angular distance from the stagnation point.

What is the value of a call with strike price : what is the value of a call with strike price K = $1 and maturity one month, i.e. T = 1/12?

User Account

All Pages