Reference no: EM132444212

A firm's existing assets either have a high value of $800 million (the undervalued firm) or a low value of $400 million (the overvalued firm). The firm's manager knows the value of her firm's assets, but the market does not. The market assesses that there is a 50% chance the firm has high value assets and a 50% chance the firm has low value assets. Regardless of the value of the firm's existing assets, the manager and the market are both aware that the firm has the opportunity to invest $150 million in a new project that will generate a cash flow with a present value of $200 million. The firm currently has 15,000,000 shares outstanding. The firm does not have the internal cash to fund the project, and thus if they want to fund the project they must conduct an equity issue immediately. In the long-run (i.e., next year) the markets will learn whether the firm was the undervalued or overvalued. Suppose that the market assumes that equity sales are only made by overvalued firms and prices the equity accordingly. If an undervalued firm did issue equity in this environment, what would the undervalued firm's manager predict her firm's long-run stock price to be?