Firm A has 10 shares. The present value (PV) of the firm is 500, i.e., 50 per share. It has an investment opportunity requiring a costly investment of £X but it must sell new shares to raise this in order to take this opportunity. If it succeeds in issuing and investing, the end period firm PV will be 800 (including the cash raised by any new issue). Explain in two lines why the share price may be lower than the true PV of 50 and why the owners may be able to do little about this.

Firm A has 10 shares. The present value (PV) of the firm is 500, i.e., 50 per share. It has an investment opportunity requiring a costly investment of £X but it must sell new shares to raise this in order to take this opportunity. If it succeeds in issuing and investing, the end period firm PV will be 800 (including the cash raised by any new issue). Explain in two lines why the share price may be lower than the true PV of 50 and why the owners may be able to do little about this.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter18: Initial Public Offerings, Investment Banking, And Capital Formation

Section: Chapter Questions

Problem 9MC

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