A firm currently has 900000 shares of common stock


A firm currently has 900,000 shares of common stock outstanding. If the firm does not raise any new funds, the true value of each of these shares is $100 per share. The firm is contemplating selling equity to purchase a machine that costs $9,000,000 and generates a cash flow with a present value of $11,000,000 after the purchase (i.e. the NPV is +$2,000,000). Unfortunately, because managers expect that the market will misinterpret an equity issue announcement as a signal that the firm’s shares are overvalued, managers anticipate they can only sell new shares at a price of $90 per share. Assuming the market eventually prices the firm’s stock correctly, what will the long-run stock price be if the firm issues equity and invests in the machine? (Ignore issues such as taxation and transactions costs)

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Financial Management: A firm currently has 900000 shares of common stock
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