Lasko's has 250,000 shares of stock outstanding, $400,000 in perpetual annual earnings, and a discount rate of 16 percent. The firm is considering a new project that has initial costs of $350,000 and annual perpetual cash flows of $60,000. How many new shares must be issued to fund the new project

Extra shares required is 1,314,975

Explanation:

Outstanding shares of a firm are those shares that have already been issued to the general public and finds have been received by the company in exchange.

Current price per share = (Total value of shares : Number of shares) : Discount rate

Current price per share = (400,000 : 250,000) : 0.16

Current price per share = $10

Value of firm with project = Initial cost + { (Value of outstanding stock + Annual Perpetual cash flow) : Discount rate}

Value of firm with project = - 350,000 + { (400,000 + 60,000) : 0.16}

Value of firm with project = $2,525,000

New price per share = 2,525,000 : 250,000 = $10.10

Extra amount needed for project = 2,525,000 - 400,000 = 2,152,000

Extra shares required = (2,152,000 : $10.10) : 0.16

Extra shares required = 1,314,975