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

Ganga Foods Ltd. has 5,00,000 shares. A project requires an initial outlay of ₹80,00,000 and is expected to generate present value of cash inflows of ₹1,05,00,000 when discounted at the firm's cost of capital. The market price per share before the announcement of the project is ₹60 and the market fully reflects the project's NPV on announcement. What is the expected market price per share after the announcement?

The project's NPV is 1,05,00,000 minus 80,00,000, which is ₹25,00,000. Spread over 5,00,000 shares this adds ₹5 per share to the existing ₹60, so the expected price is ₹65. This shows wealth maximisation: only positive NPV raises shareholder wealth.

  1. A₹65Correct
  2. B₹80
  3. C₹75
  4. D₹60

Explanation

NPV = 1,05,00,000 - 80,00,000 = ₹25,00,000. Increase per share = 25,00,000 / 5,00,000 = ₹5. New price = 60 + 5 = ₹65. Check: 65 x 5,00,000 = 3,25,00,000 = 3,00,00,000 + 25,00,000. Option ₹80 wrongly adds PV of inflows per share (21) ignoring outlay; ₹75 uses a wrong NPV; ₹60 ignores the NPV.

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