ABC Co. With existing assets alone expects to generate annual income of $50,000
ID: 2654504 • Letter: A
Question
ABC Co. With existing assets alone expects to generate annual income of $50,000 perpetually. It has 30,000 shares outstanding now and plans to issue 4,500 new shares one year from now at a price of $8.00 per share. The company’s investment opportunities are such that the return on the new equity capital is expected to be 20% per annum. If investors require an annual return of 10%, what is the present value of the company? Show your computations using two (2) possible equity valuation methods and give each name of the valuation method before each computation.Explanation / Answer
Current income = 50000
Outstanding shares = 30000
New shares to be issued = 4500
Value of new shares = 4500*8 i.e 36000
Return on new investment = 36000*20% i.e 7200
Income after new shares are issued = 50000+7200 i.e 57200
Present value of firm = 57200/0.10 i.e 572000