Required: 1. Compute the value of the firm before taking on the investment opportunity. 2. Compute the value added to the firm if the investment opportunity is undertaken. 3. What is the price per share of GFP if the investment opportunity is undertaken?
The Great Flying Pterosaur Company (GFP) currently produces drones for
commercial use. This product is expected to be in use for the foreseeable
future, GFP’s annual net profit after tax are expected to be $400,000 per
annum. Capital allowances (straight-line) are $20,000 per annum for the
company’s existing non-current assets.
GFP issued
dividend rate is 5 percent. GFP is expected to pay its investors. There are
2,000,000 ordinary shares outstanding. GFP’s cost of capital is 10 percent.
GFP is considering to put aside $270,000 to purchase a machine to produce
an additional line of drones. This machine will operate for three years. At the
end of its useful life, it be disposed for zero value. The risk level of the company
will remain unchanged. The expected demand is 10,000 new drones per year.
Each new drone will be priced at $40 and thereafter rise at 8 percent per year.
Total variable costs are expected to be $20 per drone in the first year and
thereafter rise at 5 percent per year. The corporate tax is at 33 percent.
Required:
1. Compute the value of the firm before taking on the investment
opportunity.
2. Compute the value added to the firm if the investment opportunity is
undertaken.
3. What is the price per share of GFP if the investment opportunity is
undertaken?
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