A firm has just announced its plan to invest in the following project:
Y0 10M$
Y1 4M$
Y2 6M$
Y3 6M$
Y4 6M$
Y5 9M$
The firm has a cost of capital of 10% and 10M shares outstanding. How would you expect the firm’s share price to react to the announcement?
The firm has announce a capital investment which require initial capital of $10 million and the project provides cash inflow for next 5 year. Cost of capital of company is 10%.
So, NPV of project at 10% discount rate is calculated in excel and screen shot provided below:
Net present value of project is $12,789,302.77.
Number of share outstanding = 10,000,000
NPV per share = $12,789,302.77 / 10,000,000
= $1.2789.
So, stock price of company increase by $1.2789 or $1.28.
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