Question

Winpak, Inc. had a current share price of $49.20, and the firm had 1,400,000 shares of stock outstanding. The company is considering an investment project that requires an immediate $3,800,000 investment but will produce a single cash flow of $8,100,000 after 4 years then close. If Winpak, Inc. invests in the project, what would the new share price be? Winpak, Inc.'s cost of capital is 11%. (Hint: calculate the project NPV then consider how the project NPV affects stock price)

		$49.70
		$50.30
		$50.80
		$51.40
		$51.70

Answer 1

Initial Investment in Project will cost = $3800,000

the Project will generate a single cashflow in year 4 = $8100,000

Calculating the NPV of the Project:-

NPV = Present Value of cashflow - Initial Investment

= [$8100,000/(1+0.11)^4] - $3800,000

= $5335,720.89 - $3800,000

= $1535,720.89

NPV of the Project = $1535,720.89

The NPV of the above project will add value to the existing share price of the company as NPV will increase the vlaue of firm.

NPV per share = $1535,720.89/1400,000 shares

= $1.10 per share

The new share price after NPV inclusion = Existing price + NPV per share

= $49.20 + $1.10

= $50.30

So, the new share price be $50.30

Option 2

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