6. Firm AAA has no debt. Existing assets generate earnings of $20mil. per year forever. Discount...
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6. Firm AAA has no debt. Existing assets generate earnings of $20mil. per year forever. Discount rate=10%. Firm has n shares (5 mil.) currently selling at P=$40 per share. Now firm plans to invest I=$40mil. in new project. Project will generate $5 mil. in new earnings per year forever. Firm will issue new shares to fund this new project. a. In an efficient capital market, what is the price that new shareholders are willing to pay for each share of Firm AAA'stock? What is the gain by existing shareholders? b. Suppose market is inefficient and new shares can be sold for $45, what is the gain/loss by new shareholders from purchasing these new shares? 6. Firm AAA has no debt. Existing assets generate earnings of $20mil. per year forever. Discount rate=10%. Firm has n shares (5 mil.) currently selling at P=$40 per share. Now firm plans to invest I=$40mil. in new project. Project will generate $5 mil. in new earnings per year forever. Firm will issue new shares to fund this new project. a. In an efficient capital market, what is the price that new shareholders are willing to pay for each share of Firm AAA'stock? What is the gain by existing shareholders? b. Suppose market is inefficient and new shares can be sold for $45, what is the gain/loss by new shareholders from purchasing these new shares?
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Related Book For
Financial Reporting Financial Statement Analysis and Valuation a strategic perspective
ISBN: 978-1337614689
9th edition
Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
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