1. Dimkoff Tennisworld, Inc. has 4 million shares of common stock outstanding, c
ID: 2730945 • Letter: 1
Question
1. Dimkoff Tennisworld, Inc. has 4 million shares of common stock outstanding, currently selling for $15 per share. The company is considering undertaking some new investments that are listed below with their initial investment costs and estimated profitability indices.
Investment Prospect Initial Investment PI
A. Expand clothing line $2,000,000 1.5
B. Open European stores 3,000,000 1.6
C. Produce aluminum rackets 800,000 2.0
D. Produce more tennis balls 1,500,000 1.4
E. Increase advertising 500,000 2.8
a. Which investment will add the most value to stockholders’ wealth? Justify your answer.
b. What would Dimkoff’s theoretical stock price be if the company undertook all five investments?
Explanation / Answer
Part A
First we need to compute NPV of all bonds
NPV= PV of cash inflows – initial investment
= Initial investment x PI – initial investment
Project
Initial Investment
PI
Initial Investment x PI
NPV
A
2000000
1.5
3000000
1000000
B
3000000
1.6
4800000
1800000
C
800000
2
1600000
800000
D
1500000
1.4
2100000
600000
E
500000
2.8
1400000
900000
5100000
The investment with the highest NPV will add the highest value. That is Investment B.
Part B
Per share addition in shareholder’s wealth = total npv/ no. of shares
= 5100000/ 4,000,000
= 1.275
New price = old price + net addition
= 15 +1.275
= 16.275
Project
Initial Investment
PI
Initial Investment x PI
NPV
A
2000000
1.5
3000000
1000000
B
3000000
1.6
4800000
1800000
C
800000
2
1600000
800000
D
1500000
1.4
2100000
600000
E
500000
2.8
1400000
900000
5100000
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