Explore BrainMass
Share

Explore BrainMass

    New issue of shares

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Firm X has 100,000 shares of stock currently outstanding. Each share currently has a true value of $60. Suppose the firm issues 20,000 shares of new stock at the following prices: (a) $65, (b) $55, and (c) $30. The firm takes the funds raised in the issue and invests in securities (i.e., a 0 NPV project). What will be the effect of each of the alternative offering prices on the long-run market price of the shares after the issue assuming that in the long-run the market price for the stock will reflect the stock's true value? (Ignore issues such as taxation and transactions costs)

    © BrainMass Inc. brainmass.com October 9, 2019, 9:00 pm ad1c9bdddf
    https://brainmass.com/business/accounting-for-corporations/new-issue-shares-169406

    Solution Preview

    Firm X has 100,000 shares of stock currently outstanding. Each share currently has a true value of $60. Suppose the firm issues 20,000 shares of new stock at the following prices: (a) $65, (b) $55, and (c) $30. The firm takes the funds raised in the issue and invests in securities (i.e., a 0 NPV project). What will be the effect of each of the alternative offering prices on the long-run market price of the shares after the issue assuming that in the long-run the market price for the stock will reflect the stock's ...

    Solution Summary

    The expert calculates the price of shares after a new issue of shares.

    $2.19