A firm has 100,000 shares of stock currently outstanding. Each share currently h

Question

A firm has 100,000 shares of stock currently outstanding. Each share currently has a true value of $70. Suppose the firm issues 20,000 shares of new stock at the following prices: (a) $75, (b)$65, and (c) $40. The firm takes the funds raised in the issue and invests in securities (i.e. a 0 NPV project). What will be the effect of each of the alternative offering prices on the long-run market price of the shares after the issue assuming that in the long-run the market price for the stock will reflect the stock's true value? (Ignore issues such as taxation and transaction costs).

Here's what I think:

NPV of zero means no gain or loss to firm. Therefore the cash value to the firm would essentially be replaced with the "no value" project and reduce the per share value overall. 7mm/120k = 58.33

Explanation / Answer

Yes absolutely because the investments are No NPV that is, So, No gain no loss.. True value reduced as quantity of shares increases...So, 58.33 is the new value true of shares i.e 120000..

THanks n ask if have any more doubt :)

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