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Determine the net present value of the project

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The DR motor car company has 100 shares of stock outstanding. The net earn- ings of the company are $5,000 per year, continuing forever. The firm announces that one year from now the company will have an opportunity to pay $1,000 to begin the con- struction of a new plant. One year after construction begins, the plant will generate addi- tional net earnings equal to $330/year. These additional earnings will continue forever.

Determine:

(a) The net present value of the project.

(b) The new equilibrium price of a share if the firm finances the project by issuing new shares when the construction of the plant begins.

(c) The number of new shares that the firm must issue.

Reference no: EM13892354

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