Assume the firm has no debt, the total value of the firm is $900 million. However, its managers know the market has overestimated the future free cash flows and that the true firm value is only $700 million. Suppose the company raises $300 million of new equity and invests in proiects with a present value of $300 million. What is the stock value of new shareholders after investors realize the firm is overoriced?

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Lets break down the situation 1 The initial market value of the firm is 900 million but its true val... View the full answer