Undertake new investment


A firm expects to generate net income of $600 million, $550 million, and $500 million at the end of each of the next three years.  Then, firm's net income is expected to grow at 4% constant rate thereafter.  These net incomes are generated by firm's existing investments.  This firm has a beta of 1.0 and has 100 million shares outstanding.  Suppose the risk-free rate and market risk premium are 4% and 6%, respectively. Now, this firm considers a new investment, which will cost $300 million and $200 million at the end of first and second year.  The, this project will provide an additional expected net income of $400 million and $350 million ONLY at the end of fifth and sixth year. Then this new project will be abandoned at no residual value at the end of sixth year.  Also, assume that the firm's only financing alternative to support this investment project is to utilize its internally generated cash flows (net income).  How much should you be willing to pay for this stock if firm decides to undertake this new investment?

Solution Preview :

Prepared by a verified Expert
Finance Basics: Undertake new investment
Reference No:- TGS0554510

Now Priced at $10 (50% Discount)

Recommended (98%)

Rated (4.3/5)