Question

ll Gas Corporation has annual income of $5 million and has 1 million shares of stock outstanding. The company has no expansion opportunities, and depreciation equals the replacement cost necessary to maintain the current level of output, so income is available to distribute as dividends and is expected to continue indefinitely. Dividends are paid annually and the last dividend was just paid. Similar investments pay a rate of return of 10 percent.
A new investment opportunity arises for the company. The investment will require $2 million of equity a year from now, and will earn income (available for dividends) of $500,000 a year indefinitely. Assume that investors in a fully informed market become aware of the new investment opportunity and know the equity requirement will be funded with the sale of new shares.

What will be the price of the new shares issued?

	I.	The price of the new shares issued is $53
	II.	The price of the new shares issued is $51
	III.	The price of the new shares issued is $52
	IV.	The price of the new shares issued is $50.
	V.	The price of the new shares issued is $55

Question 6 10 points Small Gas Corooration has annual income $5 million and has 1 million shares of siock outstandinE. The companw has no expansion opportunities, and depreciation equals the replacement cost necessary to maintain the current level of output ameunvestment onporturvby arises for the.company T imstment will require S are paid annually and the last dividend was just paid. Similar investments pay a rate of return of 10 percent. become aware of the new investmmt opportunity and know the equity requirement will be tunded with the sale of new share rn income (available for dividends) of 5500.000 a year indefinitely. Assume that investors in a fully informed market What will be the price of the new shares issued? L The price of the rew shares issued is $53 . The price ot Uhe ew shares Issued is $51 I. The price of the rew thares Issued is $52 TV. The prire of the new shares insued is $50. v. The price of t new shares issued is $50

Answer 1

A E 1 2 Annual income 3 5 Rate of return 10% 4 Market value 50 5 New opportunity 7 Annual income 0.5 Rate of return 10% Market value 10 5 11 Investment 2 12 NPV 3 13 Total MV 14 53 Price 15 53 LL LL LO st LC

B A C 1 2 Annual income 3 5 4 Rate of return 0.1 D3/D4 Market value 5 6 New opportunity 7 Annual income 0.5 Rate of return 0.1 -D8/D9 Market value 10 11 Investment 2 12 NPV -D10-D11 13 Total MV =D5+D12 14 =D14/1 Price 15 16 17 18 19 20