Question
A firm is evaluating a positive-NPV project that involves doubling production capacity. The firms current earnings are $10 million per year. The project will take
A firm is evaluating a positive-NPV project that involves doubling production capacity. The firms current earnings are $10 million per year. The project will take three years to complete and will generate no cash flow for three years. It will then increase earnings to $20 million per year afterwards. The project can only be financed by issuing equity today. The firm has 1 million shares outstanding. Funding the project requires issuing 250,000 shares. The CEO says that she is against funding the project. In her words: Issuing equity to fund this project will increase the number of shares outstanding from 1 million to 1,250,000 and thus reduce our earnings per share from $10 to $8, a reduction of 20%. This reduction in EPS will depress our stock price. Does the CEOs concern make sense?
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