You are the CEO of Valu-Added Industries, Inc. (VAI). Your firm has 10,000 shares of common stock outstanding, and the current price of the stock is $100 per share. There is no debt; thus, the "market value" balance sheet of VAI appears as follows: VAI Market Value Balance Sheet --> Assets = $1,000,000; Equity = $1,000,000 You then discover an opportunity to invest in a new project that produces positive net cash flows with a present value of $210,000. Your total initial costs for investing and developing this project are only $110,000. You will raise the necessary capital for this investment by issuing new equity. All potential purchasers of your common stock will be fully aware of the project's value and cost, and are willing to pay "fair value" for the new shares of VAI common. A. What is the net present value of this project? B. How many shares of common stock must be issued, and at what price, to raise the required capital? C. What is the effect, if any, of this new project on the value of the stock of the existing shareholders?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Question
What is Correct Answer
You are the CEO of Valu-Added Industries, Inc. (VAI). Your firm has 10,000 shares of
common stock outstanding, and the current price of the stock is $100 per share. There is no
debt; thus, the "market value" balance sheet of VAI appears as follows:
VAI Market Value Balance Sheet --> Assets = $1,000,000; Equity = $1,000,000
You then discover an opportunity to invest in a new project that produces positive net cash
flows with a present value of $210,000. Your total initial costs for investing and developing
this project are only $110,000. You will raise the necessary capital for this investment by
issuing new equity. All potential purchasers of your common stock will be fully aware of the
project's value and cost, and are willing to pay "fair value" for the new shares of VAI
common.
A. What is the net present value of this project?
B. How many shares of common stock must be issued, and at what price, to raise the
required capital?
C. What is the effect, if any, of this new project on the value of the stock of the existing
shareholders?
Transcribed Image Text:You are the CEO of Valu-Added Industries, Inc. (VAI). Your firm has 10,000 shares of common stock outstanding, and the current price of the stock is $100 per share. There is no debt; thus, the "market value" balance sheet of VAI appears as follows: VAI Market Value Balance Sheet --> Assets = $1,000,000; Equity = $1,000,000 You then discover an opportunity to invest in a new project that produces positive net cash flows with a present value of $210,000. Your total initial costs for investing and developing this project are only $110,000. You will raise the necessary capital for this investment by issuing new equity. All potential purchasers of your common stock will be fully aware of the project's value and cost, and are willing to pay "fair value" for the new shares of VAI common. A. What is the net present value of this project? B. How many shares of common stock must be issued, and at what price, to raise the required capital? C. What is the effect, if any, of this new project on the value of the stock of the existing shareholders?
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