PART A
a. Shares of common stock to be issued at FAIR MARKET VALUE/PRICE = 100
No. of Shares to be issued = Initial Cash outlay / Fair Market Price = 110000 / 100 = 1100
b. Effect of new project on the value of the Stock of the Existing Shareholders:
No of Shares of common Stock = 1000000 / 100 + 1100 = 11100
Net Present Value of new project = 210000
Increase in Value of Shares of Common Stock by 210000.
Hence, Value o f per Share of Common Stock is increase by 18.9189.
Value of Stock of Existing Shareholder = 100+18.9189 = 118.9189.
PART B
Net Present Value = Net Present Value of Cash inflow (-) Net Present Value of cash outflow
NPV RULES:
NPV >= 0, ACCEPT
NPV < 0, REJECT
a) Postponing the Investment Expenditure
If we have a proposal for investment. By using the NPV method we have to calculate the present value of the net return from the investment and if proposal not satisfied the rule of NPV method i.e. net present value from investment is less than zero, then we reject the proposal.
b) How to choose Between projects With unequal Lives:
when need to choose between projects of unequal lives we use NPV method with the Equivalent-Annual-Annuity Approach. We choose the project which havemore Equivalent-Annualized value.
c) when to Replace Equipment:
When we compare two equipment, existing and proposed. We replace the existing equipment with the proposed equipment when the net present value of return from the proposed equipment is more.
Part A The stock of"Orion S.A." is trading 100 per share. Currently, the share capital of...
Part A The stock of"Orion S.A." is trading 100 per share. Currently, the share capital of the company consists of 10,000 shares and it not have any debt. Below balance sheet of the company in you can see the market values ORION Balancc Shect Assets 1000,000 Equity 1,000,000 "ORION S.A." is thinking of adopting a new project that will have in present valuce terms 210,000 net cash flows. The initial investment outlay for the project is only €1 10,000. "Orion...
The stock of “Orion S.A.” is trading €100 per share. Currently, the share capital of the company consists of 10,000 shares and it not have any debt. Below, you can see the balance sheet of the company in market values: ORION Balance Sheet Assets €1,000,000 Equity €1,000,000 “ORION S.A.” is thinking of adopting a new project that will have in present value terms €210,000 net cash flows. The initial investment outlay for the project is only €110,000. “Orion S.A.” is...
Question: The stock of “Orion S.A.” is trading €100 per share Part B Discuss upon the usage of the net present value rule in order to analyze mutually exclusive projects in the cases of: a) Postponing the investment expenditure, b) How to choose between projects with unequal lives, c) When to replace equipment? (<250 words)
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