Kumar expected his firm to earn $1,000 per year forever, with no growth. Given a cost of

Question:

Kumar expected his firm to earn $1,000 per year forever, with no growth. Given a of 10 percent, the value of the firm is $10,000. Kumar identified a new project, which costs $1,000 but would earn 11 percent per year forever. To invest in this project, Kumar cancelled this year’s dividend. Given that he is investing in a positive NPV project, he expected his stock to rise. However, it fell dramatically. Explain what happened. Does this mean that investors do not like positive NPV projects?

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...