Constor limited is an all equity firm, has 1000000 common shares outstanding and has earnings per share of $3. its tax rate is 25%. the company is considering making a 4 million investment which will increase EBIT by 20%. its plan is to issue shares at their current market value of $20.

a. Assume everything remains the same, what is the expected share price?

b. Now assume that constor ltd. would have to sell new stock at $18.50,also assume that the underwriting spread is 5% and other direct financing expenses are 200000. Based on this new info, what would be the expected share price?

c.Briefly explain the reasoning why the company's stock price might fall slightly when its announces the new equity offering and the possible rationale behind this and why?

Answer rating: 100% (QA)

a To determine the expected share price we can use the dividend capitalization model which assumes that the value of a stock is equal to the present v... View the full answer