Canary Motors, an all-equity firm, has expected earnings of £10 million per year in perpetuity. The firm pays all of its earnings out as dividends, so the £10 million may also be viewed as the shareholders’ expected cash flow. There are 10 million shares outstanding, implying expected annual cash flow of £1 per share. The cost of capital for this unlevered firm is 10 percent. In addition, the firm will soon build a new plant for £4 million. The plant is expected to generate additional cash flow of £1 million per year. What is the NPV of the new plant?

Canary Motors, an all-equity firm, has expected earnings of £10 million per year in perpetuity. The firm pays all of its earnings out as dividends, so the £10 million may also be viewed as the shareholders’ expected cash flow. There are 10 million shares outstanding, implying expected annual cash flow of £1 per share. The cost of capital for this unlevered firm is 10 percent. In addition, the firm will soon build a new plant for £4 million. The plant is expected to generate additional cash flow of £1 million per year. What is the NPV of the new plant?

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 8P

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