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Lucky Dog Inc currently has $95,000 cash on hand and no other assets. It has 1000 shares outstanding.
(a) What should be its current share price?
Lucky Dog has just uncovered an investment opportunity. It will require up-front payments of $255,000, however, requiring Lucky Dog to raise new funds. It intends to do so via a new share issue. The project is expected to return $20,315 at the end of the first year, growing at 16% annually for each of the following 10 years. The up-front payments include an investment if $25,000 in net working capital which the firm expects to recover in full at the end of the project in 11 years. The appropriate discount rate is 10.5% annually.
(b) What is the NPV of this investment project?
(c) What should happen to the price of the company’s stock upon announcement of the investment project and share issue?
(d) How many shares would have to be floated to finance the investment?
(e) What rate of return can the new investors in Lucky Dog expect to earn?
Rework Problem 1 assuming minimum cash on hand requirements are $10,000 a month through May, increase to $15,000 in June and July, increase further to $20,000 in August and September, and return to the $10,000 per month level beginning in October.
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