Erwin Enterprises has 10 million shares outstanding with a current market price of $10 per share. There

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Erwin Enterprises has 10 million shares outstanding with a current market price of $10 per share. There is one investment available to Erwin, and its cash flows are provided below. Erwin has a cost of capital of 10 percent. Given this information, determine the impact on Erwin’s stock price and firm value if capital markets fully reflect the value of undertaking the project.
Initial cash outflow = $10,000,000
Year .... Cash Inflow
1 ..... $3,000,000
2 ..... $4,000,000
3 ..... $5,000,000
4 ..... $6,000,000
5 ..... $9,800,000
Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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Introduction to Corporate Finance

ISBN: 978-0324657937

2nd edition

Authors: Scott B. Smart, William L Megginson

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