#4

Zelnor, Inc., is an all-equity firm with 120 million shares outstanding currently trading for $10.63 per share. Suppose Zelnor decides to grant a total of 12 million new shares to employees as part of a new compensation plan. The firm argues that this new compensation plan will motivate employees and is better than giving salary bonuses because it will not cost the firm anything. Assume perfect capital markets. a. If the new compensation plan has no effect on the value of Zelnor's assets, what will be the share price of the stock once this plan is implemented? b. What is the cost of this plan for Zelnor investors? Why is issuing equity costly in this case? a. If the new compensation plan has no effect on the value of Zelnor's assets, what will be the share price of the stock once this plan is implemented? If the new compensation plan has no effect on the value of Zelnor's assets, the new share price will be $. (Round to the nearest cent.) b. What is the cost of this plan for Zelnor investors? Why is issuing equity costly in this case? The cost to investors is $ million. (Round to the nearest million) Why is issuing equity costly in this case? (Select the best choice below.) A. This is a standard example of the effect of dilution on the share price which is always costly. B. It only appears costly-the value of the firm as a whole is unchanged. C. It is not costly because we are not taking into account the benefit of the equity to the employees. Once that is accounted for, the value of the firm will be the same. D. It's costly because the shareholder equity is being given away to employees for free