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.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Firm A has 10 shares. The
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.
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