Lucky Dog Inc currently has $95,000 cash on hand and no other assets. It has 1000 shares outstanding.
(a) What should be its current share price?
Lucky Dog has just uncovered an investment opportunity. It will require up-front payments of $255,000, however, requiring Lucky Dog to raise new funds. It intends to do so via a new share issue. The project is expected to return $20,315 at the end of the first year, growing at 16% annually for each of the following 10 years. The up-front payments include an investment if $25,000 in net working capital which the firm expects to recover in full at the end of the project in 11 years. The appropriate discount rate is 10.5% annually.
(b) What is the NPV of this investment project?
(c) What should happen to the price of the company’s stock upon announcement of the investment project and share issue?
(d) How many shares would have to be floated to finance the investment?
(e) What rate of return can the new investors in Lucky Dog expect to earn?