Question

Bellsouth Corporation had a current share price of $48.60, and the firm had 1,200,000 shares of stock outstanding. The company is considering an investment project that requires an immediate $15,400,000 investment but will produce a stream of cash flow of $5,950,000 each year over the next 4 years then close. There is no salvage value. If Bellsouth Corporation invests in the project, what would the new share price be? Bellsouth's cost of capital is 9.8%. (Hint: consider how the project NPV affects the stock price) $50.16 $51.55 $52.63 $53.18 $49.27

Answer 1

		Present Value (PV) of Cash Flow:
		(Cash Flow)/((1+i)^N)
		i=Discount Rate=cost of capital=9.8%=0.098
		N=Year of Cash Flow
	N	Year	0	1	2	3	4
	A	Initial Investment	($15,400,000)
	B	Cash flow		$5,950,000	$5,950,000	$5,950,000	$5,950,000
	C=A+B	Net Cash Flow	($15,400,000)	$5,950,000	$5,950,000	$5,950,000	$5,950,000	SUM
	PV=C/(1.098^N)	Present Value of Net Cash Flow	($15,400,000)	$5,418,944	$4,935,286	$4,494,796	$4,093,621	$3,542,645
	NPV=Sum of PV	Net Present Value (NPV)	$3,542,645
	D	Number of shares outstanding	1,200,000
	E=NPV/D	Increase in wealth per share	$2.95
	F	Current Share Price	$48.60
	G=E+F	New Share Price	$51.55
		Answer:$51.55