Finance 361 problem
This new project requires the
company to retain 25% of its total operating cash-flow, starting at the end of the first year.
The project offers a constant annual return on invested capital of 12%.
Before this perpetual project was identified, the company had no growth opportunities and
was able to generate a constant annual free cash-flow of 30 million dollars.
The company has 10 million shares outstanding and the return demanded by investors is
10%.
i) Calculate the price per share of the company, as of today, before the announcement
of the project.
ii) Calculate the company’s growth rate generated by the new project.
iii) Calculate the Net Present Value of Growth Opportunities.
iv) Assume the company announces the new project. Estimate the new price of the
shares of company, as of today, after the announcement of the new project.