About Modigliani-Mille Example to calculate value of existing shares

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zjqadele

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Modigliani-Miller Example
Canter Corp, an all-equity corporation, pays a constant annual dividend of USD 500,000. The firm's WACC is 10% and this year's dividend is currently just about to be declared. The firm is offered an investment that would cost USD 500,000 and earn USD 75,000 per annum in perpetuity. It has the same business risk as the rest of the firm's investments.

If the project is financed by a new share issue (upt to USD 500K), what is the value of existing shares ? (using values of existing shares = new issue proceeds +(current dividend + CF p.a. in perpetuity - Dn )/WASS ) and the dividend for existing shares ?
 
Hmm... I don't think you can just sum dividends and CFs to arrive to the current value of existing shares.

I beleive that share price does not change from issuing new equity (assuming the issue was at the market price). It's 500,000/10% = 5mln. When the company undertakes new project its market value changes by the NPV of the project. The project NPV = 250,000. So the new value of the company is simply 5.25 mln.

Guys, correct me if I'm wrong.

BTW, is M&M included in the 1st level curriculum this year? I thought it wasn't.
 
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