Question

Lasko's has 250,000 shares of stock outstanding, $400,000 in perpetual annual earnings, and a discount rate of 16 percent. The firm is considering a new project that has initial costs of $350,000 and annual perpetual cash flows of $60,000. How many new shares must be issued to fund the new project

Answer 1

Answer:

Extra shares required is 1,314,975

Explanation:

Outstanding shares of a firm are those shares that have already been issued to the general public and finds have been received by the company in exchange.

Current price per share = (Total value of shares ÷ Number of shares) ÷ Discount rate

Current price per share= (400,000 ÷ 250,000) ÷ 0.16

Current price per share= $10

Value of firm with project= Initial cost + {(Value of outstanding stock + Annual Perpetual cash flow) ÷ Discount rate}

Value of firm with project= -350,000+ {(400,000+ 60,000)÷0.16}

Value of firm with project= $2,525,000

New price per share= 2,525,000 ÷ 250,000= $10.10

Extra amount needed for project= 2,525,000 - 400,000= 2,152,000

Extra shares required= (2,152,000 ÷ $10.10)÷ 0.16

Extra shares required= 1,314,975