2. Spanners is a public firm. Currently Spanner is all equity financed. Spanner currently has 8 million shares outstanding. The current market price of these shares is 10.00/share. The firm has just discovered a new spanner-making technology. Adopting the new spanner maker will increase the value of Spanner to 120 million but require an investment of 20 million. Spanner plans to finance the investment by issuing new equity. Assume that capital markets are competitive.

(a) After Spanner announces the new technology and the equity issue, what will be the price of a share of Spanner stock?

(b) The Marketing Manager at Spanner objects to the planed investment. He arguesYes, the new technology seems to be a good investment but, if we issue all that equity, a big fraction of the firms profits will go to the new investors. This will hurt our current stockholders. What is wrong with this argument?