Replicator East Inc. is an all-equity firm with 50 million
outstanding shares currently priced at $40 per share. The firm
stock beta is 1.50, the risk-free rate is 3.0% and the market risk
premium is 6.0%. Replicator tax rate is 25%. Replicator is
considering a westward expansion that will require $500 million
investment and generate a pretax operating income of $120 million
in perpetuity. Replicator can borrow any amount at 8%.
a. If the firm decides on an all equity financing, how many
shares do you expect they will need to sell? (First compute the
project NPV, its contribution to the firm value, the new share
price once the expansion is announced, and only after that, compute
the required number of new shares)
b.Evaluate the share value, if the firm pursues debt financing.
(use the firm value from a, add the debt tax shield, revalue the
price per share.)
