Why the stock price falls when seasoned equity is offered

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Financial Markets Dr. Cheol Park Why the stock price falls when seasoned equity is offered Suppose the company currently has assets that is valued at $100M. In addition to those assets in place , the company also has an investment project. Everyone knows that this company has such an investment project. The investment project costs $10M to start, and it will bring either $15M of cash in present value, or $20M of cash in present value. Stock market participants currently believe that the two cash flows are equally likely. If the company has currently 10M shares outstanding, then what is the current stock price? P = 100 M + (0 . 5)(5 M ) + (0 . 5)(10 M ) 10 M = $10 . 75 . Now, suppose that the company’s manager knows which cash flow will realize. This is the adverse selection problem . If he knows that the realized cash flow will be $20M, would he issue new equity shares to finance the project? If he just does the rights issue, then, the share now is worth P = 100 M + 10
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