I understand that the total firm value increases by the NPV of the project plus the initial investment. However, for question 2c, we need the equity value after the announcement in order to determine the new share price and the resulting return after the announcement.
What I don’t fully understand is why the calculation for the new share price already assumes that the share buyback has occurred, even though only the project announcement has been made. According to the lecture slides of topic 8a, only the NPV of the project is added to the firm value at the time of the announcement. The other steps, such as the €1M investment on the asset side, the €2M in new debt, and the €1M equity reduction due to the buyback on the passive side, are implemented later.
So my question is:
If the task states that “the project has been announced but not yet implemented,” should we already factor in all subsequent steps (i.e., the debt issuance and the share buyback) when calculating the new share price?
Thank you very much!
What I don’t fully understand is why the calculation for the new share price already assumes that the share buyback has occurred, even though only the project announcement has been made. According to the lecture slides of topic 8a, only the NPV of the project is added to the firm value at the time of the announcement. The other steps, such as the €1M investment on the asset side, the €2M in new debt, and the €1M equity reduction due to the buyback on the passive side, are implemented later.
So my question is:
If the task states that “the project has been announced but not yet implemented,” should we already factor in all subsequent steps (i.e., the debt issuance and the share buyback) when calculating the new share price?
Thank you very much!