A new startup with 1 million shares outstanding and no debt has identified an opportunity to invest $500,000 now that will generate after-tax free cash flows of $150,000 every year forever. The company has no other investments. The appropriate cost of capital is 12% and the tax rate is 34%.

a: If the company raises the initial investment of $500,000 by issuing additional shares after announcing the investment project, what is the market value per share (or the stock price)?

Hint: First calculate the value of the unlevered firm, VU. Next, note that the stock price after the share issue will equal the firm value divided by the number of shares, including the new shares issued, since the firm is unlevered. Use this to derive an equation linking the share price to VU, the initial number of shares and the amount to be raised.

b: If the company raises the initial investment of $500,000 by borrowing money at an interest rate of 6% instead, what is the market value of equity per share (or the stock price)?