19. Pecking-order theory (S17-4) I was amazed to find that the announcement of a stock issue drives...
Question:
19. Pecking-order theory (S17-4) “I was amazed to find that the announcement of a stock issue drives down the value of the issuing firm by 20–30%, on average, of the proceeds of the issue.
That issue cost dwarfs the underwriter’s spread and the administrative costs of the issue. It makes common stock issues prohibitively expensive.”
a. You are contemplating a $100 million stock issue. On past evidence, you anticipate that announcement of this issue will drive down stock price by 3% and that the market value of your firm will fall by 30% of the amount to be raised. On the other hand, additional equity financing is required to fund an investment project that you believe has a positive NPV of
$40 million. Should you proceed with the issue?
Step by Step Answer:
Principles Of Corporate Finance
ISBN: 9781264080946
14th Edition
Authors: Richard Brealey, Stewart Myers, Franklin Allen, Alex Edmans