Company X is an all-equity financed pharmaceutical company which is considering whether to issue £20m worth of equity on the market. It is estimated that the company's value is £100m if clinical trials show that its newly developed flu vaccine has no side effect and only £20m if the trials show side effects. The results of the trials are yet to be published and the market estimates that both outcomes are equally likely, while the company's executives have full knowledge of the trials and therefore know whether there are side effects or not. The company has currently 1m shares outstanding. Assume that the company generates enough cash flows to cover all its investment needs, the market is efficient, and that the executives act in the interest of existing shareholders. a) What is the company's share price before any announcement regarding the equity issue? b) Suppose the company announces that it intends to issue equity, what is the share price on the day of the announcement (before any equity is actually issued)? C) At the price derived in point b), how many shares would the company need to issue order to raise £20m? d) What is the company's market value after issuing £20m worth of equity at the price derived in point b)?
Company X is an all-equity financed pharmaceutical company which is considering whether to issue £20m worth of equity on the market. It is estimated that the company's value is £100m if clinical trials show that its newly developed flu vaccine has no side effect and only £20m if the trials show side effects. The results of the trials are yet to be published and the market estimates that both outcomes are equally likely, while the company's executives have full knowledge of the trials and therefore know whether there are side effects or not. The company has currently 1m shares outstanding. Assume that the company generates enough cash flows to cover all its investment needs, the market is efficient, and that the executives act in the interest of existing shareholders. a) What is the company's share price before any announcement regarding the equity issue? b) Suppose the company announces that it intends to issue equity, what is the share price on the day of the announcement (before any equity is actually issued)? C) At the price derived in point b), how many shares would the company need to issue order to raise £20m? d) What is the company's market value after issuing £20m worth of equity at the price derived in point b)?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:Company X is an all-equity financed pharmaceutical company which is considering whether to issue £20m worth of equity on the market. It is estimated that the company's value is £100m if clinical trials show that its newly developed
flu vaccine has no side effect and only £20m if the trials show side effects. The results of the trials are yet to be published and the market estimates that both outcomes are equally likely, while the company's executives have full
knowledge of the trials and therefore know whether there are side effects or not. The company has currently 1m shares outstanding. Assume that the company generates enough cash flows to cover all its investment needs, the market
is efficient, and that the executives act in the interest of existing shareholders.
a) What is the company's share price before any announcement regarding the equity issue?
b) Suppose the company announces that it intends to issue equity, what is the share price on the day of the announcement (before any equity is actually issued)?
C) At the price derived in point b), how many shares would the company need to issue in order to raise £20m?
d) What is the company's market value after issuing £20m worth of equity at the price derived in point b)?
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