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• In the first problem, we learn how to apply different investment decision criteria to choose among projects

• Specifically, the NPV tells us how much value is created by taking a project

• In problem #3, we want to see how a project’s NPV translates to changes in market value of a firm. In this problem, we make the following assumptions– Markets are rational and efficient– Perfect information – i.e., market participants

fully know the value of the project

* These slides are most useful for mini-problem #3

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Case 1: Suppose management used internal funds to carry out the project and then afterwards disclose to the market that they carried out the project– Asset side of the balance sheet will rise to

$1,100,000– Equity side will rise to match the asset side– Stock price will rise to $110– Current investors will gain 10%

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Case 2: Suppose management initially kept the project a secret and raised new equity at the prevailing market price. Management makes the disclosure after it has taken on the project– Need to raise $110,000 at $100

• 1,100 new shares sold• Shares outstanding now at 11,100

– After disclosure, market value of VAI will rise to $1,210,000

– Stock price will rise to $109– Current investors will gain 9%. Some of the

benefits shared with new shareholders