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MARKSI You have recently joined an investment fund as an analyst after your graduation from the LSE. Your first assignment is to advise the investment committee on a potential investment in Boople Art a new gallery planning to specialize in digital art, and that is looking to raise $25M. The investment committee has warned you that the digital art market is in its infancy and therefore is fraught with information asymmetries about the underlying quality of galleries, and with uncertainty about the chances of disrupting the art world. A gallery can either disrupt the market and generate a cash flow of E200M, or fail to disrupt the art market, and produce a cash flow of EZOM. Aher your initial due diligence you have concluded there are broadly two types of galleries, 'innovative and "stale", of which there is an equal number in the market, and which differ in their probability of disrupting the art world. Innovative galleries have a probability of 3/4 to disrupt the market, whereas stale galleries have a lower probability of disruption equal to 1/6. The owner of Boople Art knows whether the gallery is innovative or stale, everyone is risk neutral, there is no discounting, there are no taxes, markets are competitive, and there are no costs of financial distress. 1. 12.5 marks] Suppose that you know whether Boople Art is innovative or state. If you are considering financing the Boople Art investment using equity, how large of an outside equity stake would you advise the investment committee to ask for? Would Boople Art face the same financing terms if it is innovative or state? Why? 2. 12.5 marks Suppose now that you do not know whether Boople Art is innovative or tale you are considering financing the Boople Art Investment using equity, how large of an outside equity stake would you advise the investment committee to ask for? 3. (5 marks if you are considering financing the Boople Art investment using debt what face value of debt would you advise the investment committee to ask for if you can distinguish whether the gallery is innovative or stalo? What face value of debt would you advise the Investment committee to ask for if you cannot distinguish whether the gallery is innovative or stale? 4. 15 marks Suppose you don't knwhether the gallery is disruptive or not, and you offer the owner of Boople Art to choose between the debt and equity financing contracts you found above. Which contract will the owner choose if Boople is an innovative gallery Expan 6. [10 marks Suppose now that costs of financial stress est such that live value decreases by cif the company goes bankrupt. Suppose to that you can high whether Boopie At is an innovative or stale gallery For what values of would the owner of Boopie All prefereny hinancing over det financing? Explain MARKSI You have recently joined an investment fund as an analyst after your graduation from the LSE. Your first assignment is to advise the investment committee on a potential investment in Boople Art a new gallery planning to specialize in digital art, and that is looking to raise $25M. The investment committee has warned you that the digital art market is in its infancy and therefore is fraught with information asymmetries about the underlying quality of galleries, and with uncertainty about the chances of disrupting the art world. A gallery can either disrupt the market and generate a cash flow of E200M, or fail to disrupt the art market, and produce a cash flow of EZOM. Aher your initial due diligence you have concluded there are broadly two types of galleries, 'innovative and "stale", of which there is an equal number in the market, and which differ in their probability of disrupting the art world. Innovative galleries have a probability of 3/4 to disrupt the market, whereas stale galleries have a lower probability of disruption equal to 1/6. The owner of Boople Art knows whether the gallery is innovative or stale, everyone is risk neutral, there is no discounting, there are no taxes, markets are competitive, and there are no costs of financial distress. 1. 12.5 marks] Suppose that you know whether Boople Art is innovative or state. If you are considering financing the Boople Art investment using equity, how large of an outside equity stake would you advise the investment committee to ask for? Would Boople Art face the same financing terms if it is innovative or state? Why? 2. 12.5 marks Suppose now that you do not know whether Boople Art is innovative or tale you are considering financing the Boople Art Investment using equity, how large of an outside equity stake would you advise the investment committee to ask for? 3. (5 marks if you are considering financing the Boople Art investment using debt what face value of debt would you advise the investment committee to ask for if you can distinguish whether the gallery is innovative or stalo? What face value of debt would you advise the Investment committee to ask for if you cannot distinguish whether the gallery is innovative or stale? 4. 15 marks Suppose you don't knwhether the gallery is disruptive or not, and you offer the owner of Boople Art to choose between the debt and equity financing contracts you found above. Which contract will the owner choose if Boople is an innovative gallery Expan 6. [10 marks Suppose now that costs of financial stress est such that live value decreases by cif the company goes bankrupt. Suppose to that you can high whether Boopie At is an innovative or stale gallery For what values of would the owner of Boopie All prefereny hinancing over det financing? Explain

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