Question

NCC Company had a current share price of $31.25, and the firm had 1,760,000 shares of stock outstanding. The company is considering an investment project that requires an immediate $7,100,000 investment but will produce a single cash flow of $11,600,000 after 2 years then close. If NCC Company invests in the project, what would the new share price be? NCC Company's cost of capital is 10%. (Hint: calculate the project NPV then consider how the project NPV affects stock price) $31.47 $32.66

$31.82

$32.88

$33.30

Answer 1

The new share price is computed as shown below:

The net present value per share is computed as shown below:

= ( - $ 7,100,000 + $ 11,600,000 / 1.10² ) / 1,760,000

= $ 1.41 Approximately

So the new share price will be:

= Existing share price + $ 1.41

= $ 31.25 + $ 1.41

= $ 32.66

So the correct answer is option of $ 32.66

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