Question

Stephens Inc. has a current value of $100,000 and is expected to be worth 140,000 in one year based on its current projects. Stephens also has a potential new project with a cost of $100,000 and will return $125,000. The appropriate discount rate for Stephens and the new project is 8% annually. What is the NPV of the project? Assume Stephens does not have the money to invest and must raise it by selling more equity. However, potential outside investors mistakenly believe that in one year Stephens will be worth $110,000 without the project and $220,000 with the project. How much equity (% of the firm) does Stephens need to sell outside investors (at the price they are willing to pay)? Assuming Stephens sells the equity and engages in the project are existing shareholders better or worse off?

Answer 1