Finance 361 problem

timer Asked: Sep 30th, 2013

Question description

Firm B has just decided to invest in a perpetual project which will begin to generate 

incremental cash-flows at the end of the second  year. 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


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.

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