Question

Project Plazzo has an expected return on total capital that is above the Required Return of the outside investor and where the investor and the entrepreneum plan to hold identical ownership claims. Also consider that the market is competitive. Explain in words how you could determine the amount the investor should contribute in order to acwuire a fixed percentage of the equity?

Answer 1

For project palazzo, the expected return on capital invested by the shareholder is > the required return by the investor.

entrepreneur ownership claim=investor ownership claim.

the investor wants a fixed percentage of equity. the shareholder's expected return is more than investors required rate of return.

So the shareholder would like to hold more percentage of equity. As both plan to have equal ownership claims. The investor can demand that percentage where he can expect a required return on the equity he is holding and even get right to exercise his claim of ownership.