Posted by **Brandon** on Wednesday, March 7, 2007 at 8:47pm.

Jim Bob is a stock picking genius. Every year, based on his system, he has the ability to invest $100 (only) in a security that is expected to earn a 20% return over the next year. That security always has a beta of one. Assume that the risk free rate is 4%, and the market risk premium is 6%. Assume that Jim Bob organized his trading company as a corporation, and has one share of stock outstanding and no debt. The gains from his security trading every year are paid out as dividends, so he always invests $100, and he can pass his techniques on to his kids, so Jim Bobâ€™s firm is expected to last in perpetuity. Ignore taxes.

What is the NPV of his trading opportunity each year? Should he buy the security every year?

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