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

Kavita Pharma has 5,00,000 equity shares with a current market price of Rs 160 per share. It considers a project needing Rs 40,00,000 with a present value of future cash inflows of Rs 52,00,000, financed entirely from internal funds that otherwise would be retained with no other use. Assuming the market fully reflects the project's NPV only, the expected market price per share after the announcement is:

The expected price is Rs 162.40. The project's NPV is Rs 12,00,000 (52 lakh less 40 lakh), which spread over 5,00,000 shares adds Rs 2.40 per share to the existing price of Rs 160.

  1. ARs 162.40Correct
  2. BRs 160.00
  3. CRs 170.40
  4. DRs 164.80

Explanation

NPV = 52,00,000 - 40,00,000 = Rs 12,00,000. Increase per share = 12,00,000 / 5,00,000 = Rs 2.40. New price = 160 + 2.40 = Rs 162.40. Rs 170.40 wrongly adds the 10.40 per share PV/share difference; Rs 164.80 doubles the gain.

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