IST - b. If IST issues equity, investors would conclude IST...

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a. i. Borrowing has a net cost of $20 million, or $20/100= $0.20 per share. Selling 500/13.50=37 million shares at a premium of $1 per share has a benefit of $37 million, or 37/137= $0.27 per share (i.e., 12.50 *100 +/100+(500/13.50)=12.77Therefore, issue equity. ii. Borrowing has a net cost of $20 million, or $20/100= $0.20 per share. Selling 500/13.50=37 million shares at a discount of $1 per share has a cost of $37 million, or 37/137= $0.27per share. Therefore, issue debt.
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Unformatted text preview: b. If IST issues equity, investors would conclude IST is overpriced, and the share price would decline to $12.50. c. If IST issues debt, investors would conclude IST is undervalued, and the share price would rise to $14.50. d. IF NO COST IS INCURRED BY ISSUING DEBT THEN EUITY SHOULD ONLY BE ISSUED IF OVER PRICED. BUT INVESTOR WOULD BUY EUITY AT LOWEST PRICE KNOWING ALL THIS. BECAUSE THERE WOULD NO BENEFIT TO ISSUING EQUITY ALL FIRMS WOULD PREFER TO ISSUE DEBT....
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This note was uploaded on 08/22/2011 for the course ACCOUNTING 201 taught by Professor Stevejoseph during the Winter '11 term at Aarhus Universitet.

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