Multiple choice

Firm X assets = 60m in the Location G and 0 in Location B.

The market expects either state to occur with the same probability (50%).

The Firm is 100% equity financed and has 10,000 shares outstanding, each currently priced by the market at 3,000.

The Firm is considering whether to issue 15m worth of equity to outside investors.

Assume that the firms management only pursue the interests of existing shareholders and they fully observe the Location while the market does not. Which of the following statements is correct?

A The Firm just needs to issue 5,000 shares to raise the equity capital it wants to raise

B Market investors are unlikely to believe that the Location is G if the Firm chooses to issue equity

C If the Firm announces that it will issue equity, the share price will raise above 3,000

D If the Firm announces that it will not issue equity, the share price will drop below 3,000

14