4. You are the CEO of Valu-Added Industries, Inc. (VAI). Your firm has 10,000 shares of...

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4. You are the CEO of Valu-Added Industries, Inc. (VAI). Yourfirm has 10,000 shares of common stock outstanding, and the currentprice of the stock is $100 per share. There is no debt; thus, the“market value” balance sheet of VAI looks like:
VAI Market Value Balance Sheet
Assets $1,000,000 Equity $1,000,000
You then discover an opportunity to invest in a new project thatproduces positive cash flows with a present value of $210,000. Yourtotal initial costs for investing and developing this project areonly $110,000. You will raise the necessary capital for thisinvestment by issuing new equity. All potential purchasers of yourcommon stock will be fully aware of the project’s value and cost,and are willing to pay “fair value” for the new shares of VAIcommon.
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 stockof the existing shareholders, if any?

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3.6 Ratings (333 Votes)

Solution A NPV of this project Present value of cash inflow Present value of cash outflows 210000 110000 100000 B Total assets of the company before this project 1000000 To See Answer

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4. You are the CEO of Valu-Added Industries, Inc. (VAI). Yourfirm has 10,000 shares of common stock outstanding, and the currentprice of the stock is $100 per share. There is no debt; thus, the“market value” balance sheet of VAI looks like:VAI Market Value Balance SheetAssets $1,000,000 Equity $1,000,000You then discover an opportunity to invest in a new project thatproduces positive cash flows with a present value of $210,000. Yourtotal initial costs for investing and developing this project areonly $110,000. You will raise the necessary capital for thisinvestment by issuing new equity. All potential purchasers of yourcommon stock will be fully aware of the project’s value and cost,and are willing to pay “fair value” for the new shares of VAIcommon.What is the Net Present Value of this project?How many shares of common stock must be issued (at what price)to raise the requiredcapital?What is the effect of this new project on the value of the stockof the existing shareholders, if any?