The company has 10,000 shares of common stock outstanding, and the current price of the stock is
Question:
The company has 10,000 shares of common stock outstanding, and the current price of the stock is $100 per share. The company has no debt. The vice president of engineering discovers an opportunity to invest in a new technology project that yields positive cash flows with a present value of $210,000. The total initial capital that is required for investing and developing this project is only $110,000. It is proposed that capital be raised by issuing new equity. All potential purchasers of common stock will be fully aware of the new project’s value and cost, and are willing to pay “fair value” for the new shares of the company.
a. What is the NPV of this project?
b. How many shares of common stock must be issued, and at what price, to raise the required capital, assuming the costs of underwriting these new shares are negligible?
c. What is the effect, if any, of this new project on the value of the stock of existing shareholders?
Step by Step Answer:
Engineering Management Meeting The Global Challenges
ISBN: 9781498730075,9781498730105
2nd Edition
Authors: C. M. Chang