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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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