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Question:
Aztec Ltd. is considering investing $650 million in a new project. The CFO of the company tells the directors that the present value of the net cash flows that will be generated from the project will be around $800 million. The company has 7 million shares outstanding with a market price of $120 each. The price of the company’s shares if it undertakes the new project will be closest to:
A
$141.43.
explanation
Net present value of the project = 800 – 650 = $150 million
Current market value of the company = 7 x 120 = $840 million
Market value of the company if it undertakes the project = 840 + 150 = $990 million
New share price = 990 / 7 = $141.43
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