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question archive ABC Industries is considering an investment that requires the firm to issue new equity

ABC Industries is considering an investment that requires the firm to issue new equity

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ABC Industries is considering an investment that requires the firm to issue new equity. The

project will cost $100, but will add $120 to the firm’s value. Although management believes

the firm’s value is $1,000 without the new project, outside investors value the firm at $600

without the project. If the firm currently has 100 shares outstanding, how many new shares

must it issue to finance the project? Now assume that the true value of the firm will become

known to the market shortly after the new equity has been issued. What will the firm’s stock

price be at this time if it chooses to finance this new investment? What will the stock price be

if it chooses to pass up the investment?

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