You are the CEO of Value-Added Industries, Inc. (VAI). Your firm has 10,000 shares of common stock outstanding, and the current price of the stock is $100 per share. There is no debt; thus, the “market value” balance sheet of VAI appears as follows:
VAI Market Value Balance Sheet --> Assets = $1,000,000; Equity = $1,000,000.
You then discover an opportunity to invest in a new project that produces positive net cash flows with a present value of $210,000. Your total initial costs for investing and developing this project are only $110,000. You will raise the necessary capital for this investment by issuing new equity. All potential purchasers of your common stock will be fully aware of the project’s value and cost, and are willing to pay “fair value” for the new shares of VAI common.
A. What is the net present value of this project?
B. How many shares of common stock must be issued, and at what price, to raise the required capital?
C. What is the effect, if any, of this new project on the value of the stock of the existing shareholders?