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 capture the full benefit associated with the new 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
$30,000 in NPV means shareholders capture $30,000/80,000 = $.375 per shareholder
Issue at $20.375

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