The current stock price of Spartan airlines is $40

Subject:AccountingPrice:3.87 Bought7

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The current stock price of Spartan airlines is $40. If Spartan issues equity, Spartan's management anticipates that the market will react negatively and that Spartan will onlyr be able to sell the new shares for $35 per share. However, Spartan airlines management knows that if they do not issue equity their stock will soon go up to its fair fundamental value of $50 per share. Management knows this because they have inside information that future earnings will be higher than the market expects. Currently Spartan has 100,000 shares outstanding. Spartan is considering investing in a new airplane that will cost them $350,000. They anticipate that the present discounted value of increased earnings from purchasing the new plane is $450,000.

(a) If Spartan had the cash available to purchase the new plane, should it make the purchase?

(b) If Spartan needs to finance the purchase of the new plane with equity, will it make sense for them to purchase the plane?