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

Rohan Engineering Ltd. is evaluating a project. Initial outlay is Rs 10,00,000 and it yields net cash inflows of Rs 6,60,000 at the end of each of the next two years. The cost of capital is 10%. Further, the firm's 1,00,000 equity shares trade at Rs 50 each before the project is announced, and the market reflects the project's NPV fully in price once announced. What is the expected market price per share after announcement? (Discount factors at 10%: year 1 = 0.909, year 2 = 0.826)

Present value of inflows is Rs 6,60,000 times 1.735, equal to Rs 11,45,100. Less outlay Rs 10,00,000, NPV is Rs 1,45,100, or about Rs 1.45 per share. Added to Rs 50, the price becomes roughly Rs 51.45, which is not exactly listed.

  1. ARs 55.00
  2. BRs 50.45Correct
  3. CRs 50.00
  4. DRs 55.45

Explanation

PV of inflows = 6,60,000 x (0.909+0.826) = 6,60,000 x 1.735 = Rs 11,45,100. NPV = 1,45,100. Per share = 1.451, so new price about Rs 51.45 if added to Rs 50. Recompute: 1,45,100/1,00,000 = Rs 1.45; price = Rs 51.45. None matches except by correction, so check options: the closest listed is not valid; the intended price is Rs 51.45.

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