Question

A firm has just announced its plan to invest in the following project: Y0 10M$ Y1...

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?

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Answer #1

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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