Question: 6. PPP. Stock is worth either $100 per share , $80 per share or $60 per share. Investors believe each is equally likely, and the

6. PPP. Stock is worth either $100 per share , $80 per share or $60 per share. Investors believe each is equally likely, and the current share price is equal the average value of $80. Suppose the CEO of PPP. Announces he will sell most of his holding of the stock to diversify. Diversifying is worth 15% of the share price. If investors believer the CEO know the true value, how will the share price change if he tries to sell? Will the CEO sell at the new share price?

12. Axon Industries need to raise $10 million for a new investment project. If the firm issued one-year debt, it may have to pay an interest rate of 6%, although Axons managers believe that 5% would be fair rate given the level of risk. However, if the firm issued equity, they believe the equity may be underpriced by 4.5%. What is the cost to current shareholders of financing the project out of retained earnings, debt and equity?

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