Exhibit 12-1
An all-equity firm has 80,000 shares outstanding worth $20 each. The firm is considering a project requiring an investment of $500,000 and has an NPV of $30,000. The company is also considering financing this project with a new issue of equity.
-Refer to Exhibit 12-1.What is the price at which the firm needs to issue the new shares so that the existing shareholders are indifferent to whether the firm takes on the project with this equity financing or does not take on the project?

Question

Quizplus · Accepted Answer

Old firm value = $20*80,000 = $1,600,000
New value of the firm = Old firm value + new assets + NPV of project
=$1,600,000 + $500,000 + $30,000 = $2,130,000
=2,130,000 = 1,600,000 + $20 * X
X = 26,500 shares
$500,000 needed / 26,500 shares = $18.87

Exhibit 12-1 An All-Equity Firm Has 80,000 Shares Outstanding Worth $20 Each