JK Industries (JKI) expects earnings per share of $5 next year and an equity cost of capital of 15%. Currently, they employ a 100% payout ratio and earnings are only expected to grow at a low 2%. You have been asked to evaluate a new project. JKI’s return on new investments is 13% and the project will be financed by adopting a payout ratio of 55%. Given the current expectation of slow growth, what is the company’s share price? Suppose they invest in the new project. If the equity cost of capital is unchanged, what would be the new share price? Does the project maximize shareholder value?

JK Industries (JKI) expects earnings per share of $5 next year and an equity cost of capital of 15%. Currently, they employ a 100% payout ratio and earnings are only expected to grow at a low 2%. You have been asked to evaluate a new project. JKI’s return on new investments is 13% and the project will be financed by adopting a payout ratio of 55%.

1. Given the current expectation of slow growth, what is the company’s share price?
2. Suppose they invest in the new project. If the equity cost of capital is unchanged, what would be the new share price?
3. Does the project maximize shareholder value?