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ACCA Strategic Professional · Advanced Financial Management · The role and responsibility of senior financial executive/advisor

Halo plc has 20 million shares at $5.00. A project needing $30m of new investment has a present value of future cash inflows of $36m. The market has not yet anticipated the project. The investment is funded entirely from retained cash that would otherwise have been held. Assuming the market values the project efficiently on announcement, and ignoring other effects, what is the expected share price after announcement?

The project NPV is $36m minus $30m, which is $6m. Divided across 20 million shares, this adds $0.30 per share, so the expected price is $5.30. Adding gross inflows instead of NPV would overstate the price rise.

  1. A$5.30Correct
  2. B$5.00
  3. C$5.60
  4. D$6.80

Explanation

NPV = 36 - 30 = $6m. Spread across 20 million shares, this is $0.30 per share, so the price rises to $5.30. $5.60 wrongly adds 36/20 less nothing for cost... in fact $5.60 adds the 6m twice, and $6.80 adds the gross inflows of $1.80 without deducting cost.

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