Corporate Investment and Shareholder Wealth. Why do positive NPV investments lead to increases in share price?. FPC Example (720 notes, p. 204). Firm has no debt Existing assets generate cash flows of $9M per year forever Discount rate = 10% Firm has n shares
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Corporate Investment and Shareholder Wealth
Why do positive NPV investments lead to increases in share price?
(5 mil) currently selling at P0 = $18 per share
(1.111 M shares) x (19.6364 – 18) = 1.818
They earn a return of (12/6.111)/18 = 10.91% (more than needed to attract capital)
General Case Constant Growth Special Case
1. Dividend Discount Model
2. Growth Opportunities Model