1. Now, Dr. Pennyworth has a chance to purchase one of two professional cricket

Question

1.     Now, Dr. Pennyworth has a chance to purchase one of two professional cricket clubs, the Miami Manatees or the Jacksonville Gemini. At the beginning of last year, the Manatees were purchased for $100 million, provided $10 million in profits, and are currently on sale for $110 million. On the other hand, the Gemini started the year purchased at $80 million, provided $30 million in profits, and are currently on sale for $140 million. Calculate the rate of return for the owners of each team last year. Which team would you suggest that Dr. Pennyworth purchase today?

Explanation / Answer

Rate Od return

Mantees

Year 0cashflow = =-100

Year 1 profit =10

Rate of sreturn = 10/100 =10%

Fair value gemini = 100*1.1=110

Gemini

Year 0cashflow = =-80

Year 1 cashflow = =30=30

Rate of sreturn =30/80=37.5%

Hence fair vallue of gemino = 80*1.375 =91

Which is less than 140 offered

Hence he should buy Manatees

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