My firm built a new plant two years ago with an investment of $100 million, which had an expected present value of $150 million, considering the plant's future cash flows. Today, it has become apparent that the product manufactured at the plant is not selling as well as expected. The present value of future cash flows at that point is now only worth $50 million. My firm would therefore be shutting down the plant because the net present value is now negative.

Explain briefly what is wrong with the following reasoning.

Suppose a company whose shares are trading at $20 per share becomes a target of a tender offer and the suitor is prepared to pay $28 per share. You run a valuation and conclude that a fair valuation of the company would be $1 billion. If the company has 40 million shares outstanding, explain briefly the possible reason(s) for the suitor to offer that price.

Answer rating: 100% (QA)

The reasoning is incorrect because the present value of the plant is not 50 million but 150 ... View the full answer