Genoa ltd is about to start a new project that will have a Net Present Value of

Question

Genoa ltd is about to start a new project that will have a Net Present Value
of $100 million. The stock currently trades at $105 and there are 2,000,000
shares outstanding. In order to start the project the company needs to raise
$400,000,000 in new equity, by issuing 3,000,000 new shares that will be oered
to the public.
What will be the stock price after the announcement that the company will
immediately undertake such project and issue new equity? (assume perfect
markets and no issuance costs)

Explanation / Answer

We're being asked to calculate Theoritical Ex-Rights Price (TERP).

TERP = (Market Value of Shares before New Issue + NPV + Market Value of New Shares Issued) / Total Number of Shares After New Issue

= [ ( $105 x 2 Million) + $ 100 Million + $ 400 Million] / (2 Million + 3 Million)

= [ $ 710 million] / 5 million = $ 142 per share

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