NASA has just announced that it not only found water on MARS but it also plans t

Question

NASA has just announced that it not only found water on MARS but it also plans to open a resort on MARS named “MARS for Life”. NASA wishes to sell the new venture to investors in an initial public offering (IPO). An analyst estimates expected profits (Revenues – Expenses) would be $1B one year from now. The analysts mention that these are the expected profits and the risk (standard deviation) of this venture is 30% and the correlation with the market is 0.2. For simplicity we assume that this is a 1 year project where all revenues and expenses occur 1 year from now.

Q: 1 In the public offering NASA plans to sell 50M shares. What is the maximal share price at which you will invest in the new venture?

PLEASE SHOW FULL CALCULATIONS AND OFFER EXPLANATION

Explanation / Answer

Standard Deviation = 30%

Correlation with Market = 0.2

Required rate of return (R) = 0.2*30% = 6%

Net Cash Flows after 1 year = $1 Billion

To calculate future value of net cash flows, we have to discount the net cash flows with R

Future Value of net cash flows = 1,000,000,000/(1.06)

= $943,396,226

Thus the future value of cash flows available to all shareholders = $943,396,226

No of shares = 50,000,000

Thus the future value of cash flows available for each share = $943,396,226/50,000,000 = $18.87

Thus, the maximum price at which i will invest in teh venture is $18.87 per share

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