3. You are the CEO of Valu-Added Industries, Inc. (VAI). Your firm has 10,000 sh
ID: 2791817 • Letter: 3
Question
3. You are the CEO of Valu-Added Industries, Inc. (VAI). Your firm has 10,000 shares of common stock outstanding, and the current price of the stock is $100 per share. There is no debt; thus, the "market value" balance sheet of VAI appears as follows: VAI Market Value Balance Sheet Assets $1,000,000 Equity $1,000,000 You then discover an opportunity to invest in a new project that produces positive net cash flows with a present value of $210,000. Your total initial costs for investing and developing this project are only $110,000. You will raise the necessary capital for this investment by issuing new equity. All potential purchasers of your common stock will be fully aware of the project's value and cost, and are willing to pay "fair value" for the new shares of VAI comnon A. Whnat is the net present uwliue of this project? B. How many shares of common stock must be issued, and at what price, to raise the required cnpital? C.What is the effect, if any, of this new project on the value of the stock of the existing shareholders?Explanation / Answer
a) What is the net present value of this project? Present value of Cash Flow $210,000 Less: Initial Investment -$110,000 NPV $100,000 b) How many shares of common stock must be issued (at what price) to raise the required capital? Number of shares outstanding 10000 Shares x Market Value of Per Share $100.00 Per share Existing Value Of Shares $1,000,000 NPV $100,000 Total Value $1,100,000 Value per share = $1,100,000/10,000 $110 per share Amount to be Raised $110,000 Number of shares to be raised = $110,000/$110 1,000 c)What is the effect, if any, of this new project on the value of the stock of the existing shareholders? The new project has increased the value of existing stock from $100 to $110 per share.
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