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Atlanta Corporation has no debt
Atlanta Corporation has no debt. Existing assets generate earnings of $8 million per year forever. Discount rate = 10%. Firm has X shares (4 mil) currently selling at P = $20 per share. Atlanta Corp. plans to invest I = $20 million in a new project.
Project will generate $3 million in new earnings per year, forever. Atlanta Corp. will issue X* new shares at price P* to finance project.
If new shares can only be sold for $15, what is the gain by new shareholders?
Expert Solution
| Particulars | Existing | New | Combined |
| Perpetual Earnings ($) | 80,00,000 | 30,00,000 | 1,10,00,000 |
| EPS ($) | 2.00 | 3.00 | 2.20 |
| No. Of Shares | 40,00,000 | 10,00,000 | 50,00,000 |
| Market Price ($) | 20 | 20 | 15 |
| Value of the Firm (Earnings / Discount Rate) |
8,00,00,000 | 3,00,00,000 | 11,00,00,000 |
| Theoretial Share Price | 20 | 30 | 22 |
Now, as the Theoretical Share Price is $22 as compared to Purchase Price of $20. There is $2 theoretical earning per share for the shareholders.
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