Use the Information for the Question(s)below

question 48

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%.
-What is the NPV of this project if the film maker invests his own money and does not issue the new security? What is the NPV if the film maker issues the new security?

• A)$1.7 million;$1.7 million
• B)$1.7 million;$2.7 million
• C)$2.7 million;$1.7 million
• D)$2.7 million;$2.7 million

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Definitions:

Shares

Units of ownership interest in a corporation or financial asset, providing shareholders with a claim on company assets and earnings.

Standard Deviation

Standard deviation is a statistical measure that quantifies the amount of variation or dispersion of a set of data values, typically used to assess the volatility of financial instrument prices.

Canadian Common Stocks

Shares of publicly traded companies based in Canada, representing ownership in those companies.

Normal Distribution

A probability distribution that is symmetric about the mean, showing that data near the mean are more frequent in occurrence than data far from the mean.