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Jane is the CFO of a rapidly growing company, Green Food Inc. Due to the expansion of factory facilities, this firm needs to raise external
Jane is the CFO of a rapidly growing company, Green Food Inc. Due to the expansion of factory facilities, this firm needs to raise external capital. According to Jane's analysis, this expansion project is very profitable and will be helpful to increasing the current stock price, which is $10 per share now. Based on the estimation of her firm's intrinsic value using RIM, the true firm value is also $10 per share before this expansion plan. However, William, a newly hired analyst in Green Food's accounting and finance department, expresses his concern on Jane's new equity issuance plan. He proposes that if the firm announces a new stock issuance, the potential shareholders will interpret it as a negative signal for the stock price overvaluation, thereby decreasing the stock price to $8. Jane disputes his concern saying that Your concern is only relevant when our firm's true value is lower than $10 and this expansion plan is not profitable. Because the intention of our new stock issuance is a good and innocent thing (i.e., no overvaluation of current stock price, newly raised capital will be used for a profitable project), the potential shareholders will be happy for the new stock issuance announcement and buy our stocks at $10 or even at a higher price. Do you agree with Jane? Why or why not
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