A Venture Capital Fund views target company T as a risky investment and is using dicount rate 40%. Additionally, company T is believed to have 15% probability to fail. Calculate the adjusted discount rate. The answer is (0.4+0.15)/(1-0.15)=0.647. Why? Thanks.
(1+0.4)/(1-0.15)=1.647 read the book. it is accounting for the chance of failure. now just commit it to memory and move on! no time to be asking “Why” - also possibly beyond “understand time”.
I think it should be ((1+.4)/(1-.15))