Purchase Solution

"sale of stock at a price below book value per share can

Not what you're looking for?

Ask Custom Question

FIN/554 class:

1. Brealey, Chapter 15, page 429, Challenge Question 3

Here is recent financial data on Pisa Construction.
Stock Price: $40 Market value of firm: $400,000
# of Shares: 10,000 Earnings per share: $4
Book net worth: $500,000 Return on Investment: 8%

Pisa has not performed spectacularly to date. However, it wishes to issue new shares to obtain $80,000 to finance expansion into a promising market. Pisa's financial advisers think a stock issue is a poor choice because, among other reasons, "sale of stock at a price below book value per share can only depress the stock price and decrease shareholders' wealth." To prove the point they construct the following example: "Suppose 2,000 new shares are issued at $40 and the proceeds are invested. (Neglect issue costs.) Suppose return on investment doesn't change. Then
Book net worth = $580,000
Total earnings = .08(580,000) = $46,400
Earnings per share = 46,400/12,000 = $3.87
Thus, EPS declines, book value per share declines, and share price will decline proportionately to $38.70"

Evaluate this argument with particular attention to the assumptions implicit in the numerical example.

2. Brealey, Chapter 15, page 429, Challenge Question 4

Do you think that there could be a shortage of finance for new ventures? Should the government help to provide such finance and, if so, how?

Purchase this Solution

Solution Summary

This post answers two challenge questions which help to understand the assumptions implicit and government's riole in venture capital funding.

Solution Preview

Please see the attached file. The text here may not be printed correctly due to formatting issues with tables / charts/ symbols. Thanks

1. Brealey, Chapter 15, page 429, Challenge Question 3

Here is recent financial data on Pisa Construction.
Stock Price: $40 Market value of firm: $400,000
# of Shares: 10,000 Earnings per share: $4
Book net worth: $500,000 Return on Investment: 8%

Pisa has not performed spectacularly to date. However, it wishes to issue new shares to obtain $80,000 to finance expansion into a promising market. Pisa's financial advisers think a stock issue is a poor choice because, among other reasons, "sale of stock at a price below book value per share can only depress the stock price and decrease shareholders' wealth." To prove the point they construct the following example: "Suppose 2,000 new shares are issued at $40 and the proceeds are invested. (Neglect issue costs.) Suppose return on investment doesn't change. ...

Purchase this Solution


Free BrainMass Quizzes
Situational Leadership

This quiz will help you better understand Situational Leadership and its theories.

MS Word 2010-Tricky Features

These questions are based on features of the previous word versions that were easy to figure out, but now seem more hidden to me.

Paradigms and Frameworks of Management Research

This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.

Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

Balance Sheet

The Fundamental Classified Balance Sheet. What to know to make it easy.