Firm CCC has no debt. Existing assets generate

earnings of $20mil. per year forever. Discount

rate=10%. Firm has n shares (5 mil.) currently

selling at P=$40 per share. Now firm plans to invest

I=$40mil. in new project. Project will generate $5

mil. in new earnings per year forever. Firm will issue

new shares to fund this new project.

a. In an efficient capital market, what is the price

that new shareholders are willing to pay for each

share of Firm CCC'stock? What is the gain by

existing shareholders?

b. Suppose market is inefficient and new shares can

be sold for $45, what is the gain/loss by new

shareholders from purchasing these new shares?