Hello professor, in the second exercise of the mock exam i have difficulties in understanding the equity value. I understood that if i have 10 of equity in the beginning, i will have 10 + NPV + Investment= VL and then i calculate the equity by subtracting 2 of debt from the 12 of the total value. Then, i do not understand why the value of equity that we use after to compute the return is 9. It is because we only consider the old stockholders to make the return on the stock? since we are repurchasing shares of the value of 1M and they will have 10 (old Equity) - 1M (that is the equity that now will be debt??
Thanks for the answer
Correct. The shareholders who sell make 0% return by assumption. The return we observe in the market is the one for those who stay and gain the right to the new project