Use the Information for the Question(s) Below

question 34

Multiple Choice

Use the information for the question(s) below.
An independent film maker is considering producing a new movie. The initial cost for making this movie will be $20 million today. Once the movie is completed, in one year, the movie will be sold to a major studio for $25 million. Rather than paying for the $20 million investment entirely using its own cash, the film maker is considering raising additional funds by issuing a security that will pay investors $11 million in one year. Suppose the risk-free rate of interest is 10%.
-Assuming that the film maker issues the new security,the npv for this project is closest to what amount? Should the film maker make the investment?

• A) $1.7 million; Yes
• B) $1.7 million; No
• C) $2.7 million; Yes
• D) $2.7 million; No

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Definitions:

Price Premium

The extra amount consumers are willing to pay for a product due to perceived added value or quality.

Market Share

The percentage of total sales or revenue in an industry generated by a specific company, indicating its size and competitiveness in the market.

Dollar Sales

The total revenue generated from the sale of goods or services, measured in dollars.

Fixed-price Policy

A pricing strategy where a product or service is sold at a specific price that does not change in response to market fluctuations or customer negotiations.