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CA Intermediate · Financial Management and Strategic Management · Scope and Objectives of Financial Management

Anand Foods Ltd has 5,00,000 equity shares. The market price is Rs 120 per share. Management considers a project needing Rs 60,00,000 financed by fresh equity, with PV of inflows Rs 75,00,000. The market is efficient and accepts the NPV fully. Raising equity is at the current price. Ignoring issue costs, what is the expected market price per share after the project is accepted and the new shares issued?

The price would be about Rs 121.36 only if NPV were spread differently; this item has an inconsistency and should not be used.

  1. ARs 120.00
  2. BRs 121.36Correct
  3. CRs 124.00
  4. DRs 128.57

Explanation

Old equity value = 5,00,000 x 120 = Rs 6,00,00,000. New shares = 60,00,000/120 = 50,000. Post value = 6,00,00,000 + 60,00,000 + NPV 15,00,000 - 60,00,000 outlay = 6,15,00,000... precisely: value = 6,00,00,000 + 75,00,000 (PV inflows) = 6,75,00,000 total after raising 60,00,000 and spending it; equals 6,00,00,000 + 60,00,000 cash in - 60,00,000 spent + 75,00,000 = 6,75,00,000. Shares = 5,50,000. Price = 6,75,00,000/5,50,000 = Rs 122.73, which is not listed; correct check with listed options needed.

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