Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A firm is evaluating a positive-NPV project that involves doubling production capacity. The firms current earnings are $10 million per year. The project will take

A firm is evaluating a positive-NPV project that involves doubling production capacity. The firms current earnings are $10 million per year. The project will take three years to complete and will generate no cash flow for three years. It will then increase earnings to $20 million per year afterwards. The project can only be financed by issuing equity today. The firm has 1 million shares outstanding. Funding the project requires issuing 250,000 shares. The CEO says that she is against funding the project. In her words: Issuing equity to fund this project will increase the number of shares outstanding from 1 million to 1,250,000 and thus reduce our earnings per share from $10 to $8, a reduction of 20%. This reduction in EPS will depress our stock price. Does the CEOs concern make sense?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

An Introduction To Socio-Finance

Authors: Jørgen Vitting Andersen, Andrzej Nowak

2013th Edition

3642419437, 978-3642419430

More Books

Students also viewed these Finance questions