Advanced Chemical Industries Is Awaiting the Verdict from a Court

Multiple Choice

Advanced Chemical Industries is awaiting the verdict from a court case over whether it is liable for the clean-up of wastes on a disused factory site.If it is liable,this will result in a reduction of its free cash flow by $12 million per year for ten years.If it is not liable,there will be no effect.On the close of trading the day before the announcement of the verdict,Advanced Chemicals was trading at $20 per share.Most investors calculate that there is a 100% chance that Advanced Chemicals will have a verdict returned against them.One investor,Jo,has performed extensive research into the outcome of the trial and estimates that there is no chance Advanced Chemicals will have a verdict returned against them.Given that Advanced Chemicals has 60 million shares outstanding and an equity cost of capital of 8% with no debt,Jo's estimate of the value of a share of Advanced Chemicals would be how much more than the market price?

A) $1.34
B) $20.46
C) $20.68
D) $20.96
E) $21.42