You are the CFO and are attempting to maximize the value of your firm. The firm has 10 million share of stock outstanding, no debt, a WACC of 12%, a tax rate of 40% and a stock price = $20. You are looking to invest in a new project which costs $60 million, but generates in increase in EBIT of $15 million. The YTM on new debt = 5%.
A. If the firm announces the new project and indicates they will finance it with equity, what would be the new price of the firm’s stock?
B. How many shares of stock would now be outstanding after they have raised the funds for the project by issuing equity?
C. Suppose the firm decides to fund the project with debt. What will be the market value of the company if the project is financed with debt? What will be the price per share of the firm’s stock?