The Mosley Wheat Company (MWC) has wheat fields that currently produce annual pr
ID: 1171457 • Letter: T
Question
The Mosley Wheat Company (MWC) has wheat fields that currently produce annual profits of $1,100,000. These fields are expected to produce average annual profits of $820,000 in real terms forever. MWC has no depreciable assets, so the annual cash flow is also $820,000. MWC is an all-equity firm with 385,000 shares outstanding. The appropriate discount rate for its stock is 16 percent. MWC has an investment opportunity with a gross present value of $1,900,000. The investment requires a $1,400,000 outlay now. MWC has no other investment opportunities. Assume all cash flows are received at the end of each year. What is the price per share of MWC?
The Mosley Wheat Company (MWC) has wheat fields that currently produce annual profits of $1,100,000. These fields are expected to produce average annual profits of $820,000 in real terms forever. MWC has no depreciable assets, so the annual cash flow is also $820,000. MWC is an all-equity firm with 385,000 shares outstanding. The appropriate discount rate for its stock is 16 percent. MWC has an investment opportunity with a gross present value of $1,900,000. The investment requires a $1,400,000 outlay now. MWC has no other investment opportunities. Assume all cash flows are received at the end of each year. What is the price per share of MWC?
Explanation / Answer
PV of existing business = 820000/16% = $ 51,25,000 NPV of new investment = 1900000-1400000 = $ 5,00,000 Total worth of the firm $ 56,25,000 Number of shares outstanding 385000 Price per share $ 14.61