Reference no: EM1363786
Recent financial data on Sunbeam Corp.
Stock price $40
Mart value of firm $400,000
# of shares 10,000
Earning per share $4
Book net worth $500,000
ROI 2% quarterly
Sunbeam has not performed great to date. However, it wishes to issue new shares to obtain $100,000 to finance expansion into a new market. Sunbeam's advisors think stock issue is a poor choice because, among other reasons, sale of stock at a price below book value per share can only depress the stock price and decrease shareholders wealth.
To prove this the construct the following example: Suppose 2,500 new shares are issued at $40 and the proceed are invested (neglect issue costs)
Suppose ROI doesn't change. Then
Book net worth= $600,000
Tot earnings= .0824(600,000) = $49,440
Thus, EPS declines, book value per share declines, and share price will decline proportionately to $38.40
Evaluate this argument with particular attention to the assumptions implicit in the numerical example.
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