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What price can john sell the ownership

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(a) Suppose John's current wealth is 20k. He can borrow money from a bank. Bank knows that his restaurant will generate EBIT of 200k at the end of year for sure.

Question 1: In this situation, would he want to open the restaurant? What is the value of his equity of the restaurant (at t=0) if he opens it?

Question 2: If he opens the restaurant at t=0 and sell entire ownership of the restaurant to Peter at t=0, with what price can John sell the ownership? How much return did John make relative to his investment at t=0?

(b) Suppose John has enough wealth to cover the initial cost of 100k. Assume that he can't borrow money.

Question 3: In this situation, would he want to open the restaurant? What is the value of his equity of the restaurant (at t=0) if he opens it?

Question 4: If he opens the restaurant at t=0 and sell entire ownership of the restaurant to Peter at t=0, with what price can John sell the ownership? How much return did John make relative to his initial investment at t=0?

Reference no: EM132564526

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