Question
ABC Industries is considering an investment that requires the company to issue new equity. The project will cost $100M but will add $120M to the
ABC Industries is considering an investment that requires the company to issue new equity. The project will cost $100M but will add $120M to the company's value after it is completed. Although management believes the company's value is $1B without the new project, outside investors value the company at $600M without the project. If the company currently has 100,000 shares outstanding, how many new shares must it issue to finance the project? Now assume that, in the near future, the true value of the company will become known to the market. However, the company cannot wait to invest in the project. If it does not invest now, then it will lose access to the project. What will the company's stock price be once the market learns the true value if the company issued equity and invested in the project? What will the company's stock price be once the market learns the true value if the company passed up the investment and did not issue equity?
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