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(Answered) Venture Capital


Pickwick Electronics is a new high-tech company financed entirely by 1 million ordinary shares, all of which are owned by George Pickwick. The firm needs to raise $1 million now for stage 1 and, assuming all goes well, a further $1 million at the end of 5 years for stage 2.;First Cookham Venture Partners is considering two possible financing schemes;1. Buying 2 million shares now at their current valuation of $1.;2. Buying 1 million shares at the current valuation and investing a further $1 million at the end of 5 years at whatever the shares are worth.;The outlook for Pickwick is uncertain, but as long as the company can secure the additional finance for stage 2, it will be worth either $2 million or $12 million after completing stage 2. (The company will be valueless if it cannot raise the funds for stage 2).;Show the possible payoffs for Mr. Pickwick and First Cookham and explain why one scheme might be preferred. Assume an interest rate of zero.
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