Birds and More is considering a project which requires the purchase of $175,000 of fixed assets.The net present value of the project is $4,500.Equity shares will be issued as the sole means of financing this project.The price-earnings ratio of the project equals that of the existing firm.What will the new market value per share be after the project is implemented given the following current information on the firm? $$\begin{array} { l r }
\text { Number of shares outstanding } & 24,000 \
\text { Book value } & \$ 320,000 \
\text { Market value } & \$ 457,600 \
\text { Net income } & \$ 18,000
\end{array}$$

Question

Birds and More is considering a project which requires the purchase of $175,000 of fixed assets.The net present value of the project is $4,500.Equity shares will be issued as the sole means of financing this project.The price-earnings ratio of the project equals that of the existing firm.What will the new market value per share be after the project is implemented given the following current information on the firm? $$\begin{array} { l r } 
\text { Number of shares outstanding } & 24,000 \
\text { Book value } & \$ 320,000 \
\text { Market value } & \$ 457,600 \
\text { Net income } & \$ 18,000
\end{array}$$

Quizplus · Accepted Answer

Current market value per share = $457,600/24,000 = $19.07Number of new shares needed = $175,000/$19.07 = 9,178.32 sharesNew market value per share = ($457,600 + $175,000 + $4,500)/(24,000 + 9,178.32) = $19.20

Birds and More Is Considering a Project Which Requires the Purchase