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Financial Management Final Assignment Section 4 Group 9

Based on the information provided: - The net present value (NPV) of the project is $100,000. This is calculated as the present value of cash inflows ($210,000) minus the present value of cash outflows ($110,000). - To raise the $110,000 required capital, 1,000 shares must be issued at a price of $110 per share. - Issuing new shares at $110 per share will have a positive effect on the value of existing shareholders' stock. The old stock price was $100 per share. The new stock price established in the capital raise is $110 per share. This represents a $10 per share increase in value for existing shareholders.

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226 views8 pages

Financial Management Final Assignment Section 4 Group 9

Based on the information provided: - The net present value (NPV) of the project is $100,000. This is calculated as the present value of cash inflows ($210,000) minus the present value of cash outflows ($110,000). - To raise the $110,000 required capital, 1,000 shares must be issued at a price of $110 per share. - Issuing new shares at $110 per share will have a positive effect on the value of existing shareholders' stock. The old stock price was $100 per share. The new stock price established in the capital raise is $110 per share. This represents a $10 per share increase in value for existing shareholders.

Uploaded by

saksham.dm253064
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as XLSX, PDF, TXT or read online on Scribd
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A.

Year 0 Year 1 Year 2 Year 3


-1000000 371739 371739 371739
Subsidized cashflow -877899 371739 371739 371739

B. Year 0 Year 1 Year 2 Year 3


-1000000 371739 371739 371739
subsidy 0 128261 128261
net cash flow -1000000 500000 500000 371739
cumulative cash flow -1000000 -500000 0
Subsidized cashflow -743,478 371739 371739 371739

C. Year 0 Year 1 Year 2 Year 3


-1000000 371739 371739 371739
0 1 1 1
-1000000 371740 371740 371740

Year 0 Year 1 Year 2 Year 3


-1000000 371739 371739 371739
0 43521.80 43521.80 43521.80
-1000000 415260.80 415260.80 415260.80
Subsidized cashflow -887,334 371739 371739 371739

D. ARR Year 0 Year 1 Year 2 Year 3


-1000000 371739 371739 371739
Average annual cashflow 371739
Investment 1000000 + subsidy
number of years 4
Desired ARR 40%
subsidy = 173913.33 calculated manually
Subsidized cashflow -826,087 371739 371739 371739
MBA Tech. Inc.
Year 4 IRR Subsidy NPV(@20%)
371739 Actual 18%
371739 Needed 25% 122101.18
Discount Rate 20%

Year 4
371739 35% 256,522 877,717
218,856
371739 Q. MBA Tech, Inc is neg
building. The city has a
371739
a. Subsidize the proj
b. Subsidize the proj
Year 4 c. Subsidize the proj
371739 d. Subsidize the proj
1
371740 -37663.81 -37663.81

Which of the four subs


Year 4
371739
43521.80
415260.80 75000.00 24% 112,666
371739

Year 4
371739

371739 28% 173,913


Subsidy year 0 year 1 year 2 year 3 year 4 NPV IRR
Initial 0 -1000000 371739 371739 371739 371739 -37666 18%
A 122101.178 -877899 371739 371739 371739 371739 84435 25%
B 256522 -743478 371739 371739 371739 371739 218856 35%
C 112666 -887334 371739 371739 371739 371739 75000 24%
D 173,913 -826087 371739 371739 371739 371739 136247 28%

Q. MBA Tech, Inc is negotiating with the mayor of Bean City to start a manufacturing plant in an abandoned
building. The city has agreed to subsidize MBAT with the following parameters.

a. Subsidize the project to bring its IRR to 25%.


b. Subsidize the project to provide a two year payback:
c. Subsidize the project to provide an NPV of $75000 when cash flows are discounted at 20%.
d. Subsidize the project to provide an accounting rate of return (ARR) of 40%.

Which of the four subsidy plans would you recommend to the city if the appropriate discount rate is 20%?

Comments: As I have been hired by the city to recommend a subsidy plan that
minimizs the cost to the city. So I would recommend Plan C. As per the analysis of
cashflows this Plan ofers the lowest subsidy. Moreover in this case IRR is > discount
rate which also suggests its a good investn type project.
Discount rate
20%
20%
20%
20%
20%

bandoned

e is 20%?
Value Adde
Total Asset = total liability+ total equity = $ 1,000,000
PV of cash inflows = $ 210,000
PV of cash outflows = $ 110,000
NPV = PV of cash inflows- PV of cash outflow = $ 100,000

We need to raise a total of $ 110,000


current price of stock $ 100.00
number of stocks 10000

currently total asset = equity + cash inflow= $ 1,210,000


let
we issued additional 'n' number of shaes
at price 'p'
therefore np= $ 110,000
currently total asset = (n+10000)*p = $ 1,210,000
np + 10000p = $ 1,210,000
110000 + 10000p = $ 1,210,000
p= $ 110 Q. How many shares of common stock must
n= 1000 issued(at what price) to raise the required c

What is the effect, if any, of this new project on the value of the stock of the existing share holders?
old stock price= $ 100.00
new stock price = $ 110
change in price= $ 10.00
Value Added Industries

Q. What is the net present value of the project?

of common stock must be


) to raise the required capital?

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