39. (LO 22.6) Kumar expected his firm to earn $1,000 per year forever, with no growth....
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39. (LO 22.6) Kumar expected his firm to earn $1,000 per year forever, with no growth. Given a cost of capital of 10 percent, the value of the firm is $10,000. Kumar identified a new project, which costs $1,000 but would earn 11 percent per year forever. To invest in this project, Kumar cancelled this year's dividend. Given that he is investing in a positive NPV project, he expected his stock to rise. However, it fell dramatically. Explain what happened. Does this mean that investors do not like positive NPV projects? 39. (LO 22.6) Kumar expected his firm to earn $1,000 per year forever, with no growth. Given a cost of capital of 10 percent, the value of the firm is $10,000. Kumar identified a new project, which costs $1,000 but would earn 11 percent per year forever. To invest in this project, Kumar cancelled this year's dividend. Given that he is investing in a positive NPV project, he expected his stock to rise. However, it fell dramatically. Explain what happened. Does this mean that investors do not like positive NPV projects?
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