Erinwood is an all equity firm with 8,500,000 shares of common stock outstanding. The company expects to earn $5.5 million per year in perpetuity and has $4.5 million of cash that is planning to use to pay an immediate dividend. The unlevered cost of capital for the company is 12%, while cost of debt is 5%. Erinwood is considering starting a new project. The project will cost $5 million and will create an additional cash flow of $600,000 in perpetuity. Assume perfect financial markets and no taxes.
a) If the company decides to finance the project with cash reserves and not to pay the dividend, what would be the company value and the new price per share?
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