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

Kavita Motors Ltd. has 4,00,000 equity shares. The market price is ₹150 per share. It is evaluating a project requiring ₹40,00,000 initial outlay, whose present value of future cash inflows (discounted at the appropriate risk-adjusted rate) is ₹52,00,000. Assuming the market fully recognises the project's value and the outlay is funded from internal cash already held (not affecting share count), what will be the expected market price per share after accepting the project?

The expected price is ₹153. The project's net present value is ₹52 lakh minus ₹40 lakh, which is ₹12 lakh, and spread over 4 lakh shares this adds ₹3 per share to the existing ₹150. Using gross inflows instead of NPV would overstate the gain.

  1. A₹153Correct
  2. B₹163
  3. C₹150
  4. D₹180

Explanation

NPV = 52,00,000 - 40,00,000 = ₹12,00,000. Increase per share = 12,00,000 / 4,00,000 = ₹3. New price = 150 + 3 = ₹153. Adding the whole PV of inflows per share (₹13) ignores the outlay and gives ₹163, a wrong base.

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