Share
Explore BrainMass

Net Present Value (NPV), Stock Valuation, Issuing New Equity

Walton Industries, Inc. (WII), has 10,000 shares of common stock outstanding, and the current price of the stock is $100 per share. The firm does not have any debt. The CEO discovs an opportunity in a new project that produces positive net cash flows with a present value of $210,000. The total initial costs for investing and developing this project are only $110,000. The CEO will raise the necessary capital for this investment by issuing new equity. All potential buyers of the firm' common stock will be fully aware of the project's value and cost, and are willing to pay "fair value" for the new share of WII common stock.

a) What is the net present value of this project?

b) How many shares of common stock must be issued, and at what price to raise the required capital? Hint: the stock price should reflect the value created by the investment opportunity.

c) What is the effect, if any, of this new project on the value of the stock of existing shareholders?

Solution Preview

Walton Industries, Inc. (WII), has 10,000 shares of common stock outstanding, and the current price of the stock is $100 per share. The firm does not have any debt. The CEO discovs an opportunity in a new project that produces positive net cash flows with a present value of $210,000. The total initial costs for investing and developing this project are only $110,000. The CEO will raise the necessary capital for this investment by issuing new equity. All potential buyers of the firm' common stock will be fully aware of the project's value and cost, and are willing to ...

Solution Summary

The following are determined:
a) the net present value of this project,
b) the number of common stock and the price at which the shares are issued to raise the required capital,
c) the effect of the new project on the value of the stock of existing shareholders

$2.19