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Review problem on an enthusiastic entrepreneur

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Question: Vasanth, an enthusiastic entrepreneur, has just launched DATown.com as an online social network. For funding, Vasanth approached Somik, an aspiring venture capitalist. Somik believes that Vasanth's site needs an investment of $12 M to be fully functional.

If DATown succeeds, Somik's stake in the company will be worth $100 M, but if it fails, he will get nothing. Somik believes that DATown has a 1 in 4 chance of success. Somik asks you to advise him with this decision. You assess his risk attitude and find that he follows the delta property and that he has a risk tolerance of $200 M.

Chris, a market researcher, offers Somik his services for $1 M. Somik believes that Chris' information has an accuracy of 60% and is symmetric. Should Somik hire Chris for his services?

a. Yes, because Chris' information is economic.

b. No, but he would hire Chris if the charge were $500 K.

c. No, because Chris' information is not material to Somik's decision.

d. You need more information to answer this question.

Reference no: EM131754950

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