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 the market = 0.2

Required rate of return (R) = 0.2*30% = 6% (This is the minimum return the investor expects)

Net Cash flows after 1 year = $1 Billion

Discounting the future cash flows with R:

1,000,000,000/(1.06) = 943,396,226

Thus Future value of net cash flows = $943,396,226

No of shares = 50,000,000

Thus maximum price price per share = 943,396,226/50,000,000 = $18.87

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