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Find what would be the expected share price

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CanStar Limited is an all equity firm, has 1,000,000 common shares outstanding and has earnings per share (EPS) of $3.00. Its tax rate is 25%. The company is considering making a $4 million investment which will increase EBIT by 20%. Its plan is to issue shares at their current market value of $20.

Problem 1: Assuming everything else remains the same, what is the expected share price? Show your work.

Problem 2: Now assume that CanStar would have to sell new stock at $18.50. Also assume that the underwriting spread is 5% and other direct financing expenses are $200,000. Based on this new information, what would be the expected share price?

Problem 3: Briefly explain the reasoning why the company's stock price might fall slightly when it announces the new equity offering?

Reference no: EM132677781

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