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1 Econ 243: Assignment 5 1) Your friend's untrustworthy cousin offers to sell you stock in Vandelay Industries, a startup plastic manufacturing firm. The company is currently paying $8.00 a share in dividends. You are under the impression that there are only two possibilities: either the company will take off and dividends will grow at 14%, or the company will stagnate and experience 2% dividend growth. You guess there is a 66% chance that the firm will take off. a) If you require a 25% return on Vandelay Industries, how much should you offer for a share? b) If your friend's cousin is very familiar with the company and knows exactly what the growth rate will be, under what circumstances would he accept your offer? Under what circumstances would he decline? c) Does your answer to b) affect how much you are willing to offer? Explain. d) If your friend's cousin is absolutely certain the company will take off but you can't take him at his word, what can he do to convince you? e) If other potential investors are just as uncertain as you about Vandelay Industries, how is Vandelay Industries most likely procuring external funds for investment: by issuing stocks, issuing bonds, or via financial intermediaries? How is Vandelay industries least likely to procure external funds? Explain. 1 Econ 243: Assignment 5 1) Your friend's untrustworthy cousin offers to sell you stock in Vandelay Industries, a startup plastic manufacturing firm. The company is currently paying $8.00 a share in dividends. You are under the impression that there are only two possibilities: either the company will take off and dividends will grow at 14%, or the company will stagnate and experience 2% dividend growth. You guess there is a 66% chance that the firm will take off. a) If you require a 25% return on Vandelay Industries, how much should you offer for a share? b) If your friend's cousin is very familiar with the company and knows exactly what the growth rate will be, under what circumstances would he accept your offer? Under what circumstances would he decline? c) Does your answer to b) affect how much you are willing to offer? Explain. d) If your friend's cousin is absolutely certain the company will take off but you can't take him at his word, what can he do to convince you? e) If other potential investors are just as uncertain as you about Vandelay Industries, how is Vandelay Industries most likely procuring external funds for investment: by issuing stocks, issuing bonds, or via financial intermediaries? How is Vandelay industries least likely to procure external funds? Explain

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