A firm has 500000 shares outstanding the current market, Ask an Expert

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A firm has 500,000 shares outstanding. The current market price is $20 per share. The firm also has $2 million of risk free debt. The expected return on equity is 15% and the risk free rate 4%.

(a) What is the firm’s weighted average cost of capital?

(b) The firm has identified a new project which requires an investment of $2 million and promises a payoff of $400,000 per year forever. The project has the same risk as the firm. What is the net present value of the project?

(c) Suppose that the project is financed with $1 million new equity and $1 million new, risk free debt. Construct the balance sheet.

(d) What is the new price per share?

(e) How many new shares are issued?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M93048665

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