Spartan Airlines has not debt, and its current assets are worth $50 per share

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Spartan Airlines has not debt, and its current assets are worth $50 per share. Management knows

the value of the company's assets, but the current stock price of Spartan Airlines is only $40 per

share. If Spartan issues equity, Spartan's management anticipates that the market will react

negatively and that Spartan will only be able to sell the new shares for $35 per share. Currently,

Spartan has 100,000 shares outstanding. Spartan is considering investing in a new airplane that

will cost $350,000. Management anticipates 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 it

to purchase the plane?