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ACCA Strategic Professional · Advanced Financial Management · Financial strategy formulation

Dalton Inc has 10 million shares in issue at $6.00 each. A project with an initial outlay of $12 million has expected future cash flows with a present value of $15 million at the project's risk-adjusted cost of capital. The market is semi-strong form efficient and fully understands the project when it is announced. Assuming no other information, what is the expected share price after the announcement?

The expected share price is $6.30. The project's NPV is $3 million ($15m present value less $12m outlay), spread over 10 million shares adds $0.30 per share to the $6.00 price, as an efficient market capitalises the NPV into the share price.

  1. A$6.30Correct
  2. B$7.50
  3. C$6.00
  4. D$6.60

Explanation

NPV = 15 - 12 = $3m. Per share, 3m/10m = $0.30. Expected price = 6.00 + 0.30 = $6.30. Using the $15m PV per share ($1.50) instead of NPV ignores the outlay, giving $7.50.

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