You are the CEO of Value-Added Industries, Inc. (VAI). Your firm has 10,000 shar

Question

You are the CEO of Value-Added Industries, Inc. (VAI). Your firm has 10,000 shares of common stock outstanding, and the current price of the stock is S100 per share. There is no debt; thus, the "market value" balance sheet of VAI looks like: You then discover an opportunity to invest in a new project that produces positive cash flows with a present value of $210,000. Your total initial costs for investing and developing this project are only SI 10,000. You will raise the necessary capital for this investment by issuing new equity. All potential purchasers of your common stock will be fully aware of the project's value and cost, and are willing to pay "fair value" for the new shares of VAI common. What is the Net Present Value of this project? How many shares of common stock must be issued (at what price) to raise the required capital? What is the effect of this new project on the value of the stock of the existing shareholders, if any?

Explanation / Answer

Net Present Value (NPV) = Present Value of Project - Initial Cost

= 210000 - 110000 = 100000

2. 1100 shares need to be issued at $ 100 to receive funding of $ 100000.It is being called fair value because considering the fact that investors are aware of the project, they would be ready to pay the given share price.

3. With revised shareholding structure, the Earning Per share (EPS) would take a hit as there will be more shareholders for the entitlement of dividend and EPS per share therefrom would come down.

1. Present Value of Project 210000 Initial Cost 110000

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