10 May WHAT WILL HAPPEN TO THE SHARE PRICE WHEN THE FIRM ANNOUNCES THE PROJECT AND THE FINANCING DETAILS?
(i) An all-equity firm has annual pre-tax expected earnings of $10 mill in perpetuity. The dividend payout is 100% 10 mill shares outstanding tax rate is 35%. Cost of equity for the firm is 10%. What is the value of the firm and the price per share?(ii)It is considering building a new plant for $4 million which will generate additional pre-tax cash flow of $1 million per year in perpetuity. The risk of the new project is similar to that of the existing projects. The new plant will be financed either with debt at 6% or with equity.In both the cases compute(a) NPV of the project and decide whether the firm should undertake the project or not(b) What will happen to the share price when the firm announces the project and the financing details?
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