INN Inc. has hired you as an external consultant to evaluate a new project. After one month of diligence and evaluation, you will make a recommendation to KINN’s management today. In performing the engagement, you have determined the following information:

- Initial investment: $ 150m

- Annual EBIT: $ 28m perpetually, starting from the first year of investment

- Annual Capex: 10% of revenue

- Annual depreciation: 10% of revenue

- Net working capital: increase by $ 2m per year perpetually

Moreover, you determine that this new investment has the same business risk as KINN’s existing assets. Currently, KINN’s capital structure consists of $300m equity, with 10m equity shares outstanding. The weighted average cost of capital is 10%, cost of debt is 5%, and the riskfree rate is 4%. The corporate tax rate is 15%.

1. What is the net present value (NPV) of this project? Will you recommend KINN to make this investment?

2. Suppose that KINN’s management decide to go ahead and announce the details of the investment today. Moreover, KINN decides to issue equity to fund this investment. Suppose that investors did not expect this announcement and agree with your assessment of the investment. What will KINN’s stock price change after the announcement?

3. How many millions of shares will KINN need to issue to fund this investment?

Answer rating: 100% (QA)

To calculate the NPV of the project we need to first calculate the cash flows for each year Year 1 E... View the full answer