Consider a world with asymmetric information but no other friction. Firm-1 and Firm-2 are very similar in terms of operational and financial conditions. Both stocks currently trade at $100. However, based on private information known by the CFOs of the two firms, one firm is actually worth $80 while the other is actually worth $120. Both firms need to raise capital, either through equity or debt. You know that one of the stocks is worth $80 and the other $120, but do not know which one is worth $120. If Firm-1 were to announce that it wants to issue $1 million in equity at $100 per share, what would you infer?

Market prices should stay unchanged for Firm-2

Firm-1 is worth $120, and market price for firm-2 should be $100

Firm-2 is worth $120, and market price for Firm-1 should be $100

Firm-1 is worth $120, and market price for firm-2 should be $80

Firm-2 is worth $120, and market price for Firm-1 should be $80