Voila is an allequity firm with pretax earnings expected to be $800,000 in perpetuity. The firm has 100,000 shares outstanding. The cost of capital is 20% and the firm faces a 40% tax on all corporate earnings.

Voila is considering a major expansion of its facilities, which will require an initial outlay of $750,000 and is expected to produce additional annual pretax earnings of $250,000 per year in perpetuity. Management considers the expansion to have the same risk as the firm's existing assets.

(a) What is the value of the firm's assets prior to announcing or undertaking the proposed expansion? What is the value of the firm's equity? What is the price per share?

(b) Assume that Voila has announced the expansion and markets have responded reasonably to the announcement. Suppose Voila plans to finance the expansion by issuing common stock. How many shares of stock must be issued? What is the value of the firm's equity after the new stock issue? What is the price per share of the firm's stock?

Answer rating: 100% (QA)

So Voila must issue 131250 shares ... View the full answer