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HW Set 4
HW Set 4
Group 15
Investors believe that given asymmetric information, companies are more inclined to sell
equity when they are aware of their own overvaluation. As a result, when the equity issue is
announced, the stock price will decrease.
If the firm decides to issue equity, the market will assume there are side effects, so we take
into consideration the values for when there are side effects when computing the share price.
1,200+150
𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 = 10
= 135 euro
As mentioned in the previous questions, issuing shares means the market assumes the worst
case scenario, but, in a case where there is symmetric information, everyone will take into
consideration the average amounts, so the share price will be different.
1,400+350
𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 = 10
= 750 euro
𝐸 𝐷 10 3
𝑎𝑓𝑡𝑒𝑟 − 𝑡𝑎𝑥 𝑟𝑊𝐴𝐶𝐶 = 𝑟𝐸 × 𝐸+𝐷
+ 𝑟𝐷 × (1 − τ𝑐) × 𝐸+𝐷
= 10% × 13
+ 5% × (1 − 35%) × 13
= 8.44%
𝐿 𝐹𝐶𝐹𝑁 50 70
𝑉 =∑ 𝑁 = 1.0844
+ 2 = $105.64 thousand
(1+𝑟𝑊𝐴𝐶𝐶) (1.0844)
𝐿 𝐹𝐶𝐹𝑁 70
𝑉 = (1+𝑟𝑊𝐴𝐶𝐶)
= 1.0844
= $64.55 thousand
𝐿
𝐷𝑒𝑏𝑡 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦 = 𝑑 × 𝑉
𝐷
where 𝑑 = 𝑉
3
Time 0: 13
× 105. 64 = $24.38 thousand
3
Time 1: 13
× 64. 55 = $14.89 thousand
3
Time 2: 13
× 0 = $0
𝐸 𝐷 10 3
𝑟𝑈 = 𝑟𝐸 × 𝐸+𝐷
+ 𝑟𝐷 × 𝐸+𝐷
= 10% × 13
+ 5% × 13
= 8.85%
𝐿 𝐹𝐶𝐹𝑁 50 70
𝑉 =∑ 𝑁 = 1.0885
+ 2 = $105.18 thousand
(1+𝑟𝑈) (1.0885)
Year 1: 𝑃𝑉 = 𝐷𝑒𝑏𝑡 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦 × 𝑟𝐷 × τ𝑐 = 24. 38 × 5% × 35% = $0.42665 thousand
A one-time dividend is called a special dividend. It’s important to give them a separate name
because they will happen one time and are also much larger than normal dividends.
Either with dividends or with share repurchase, investors will receive the same share price, so
they are indifferent.