Should Sophie Pharmaceuticals make the new investment

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Question - Sophie Pharmaceuticals Ltd has 9.6 million ordinary shares on issue. The current market price is $12.50 per share. However, the company manager knows that the results of some recent drug tests have been remarkably encouraging, so that the 'true' value of the shares is $13. Unfortunately, because of confidential patent issues, Sophie Pharmaceuticals cannot yet announce these test results. In addition, Sophie Pharmaceuticals has a property investment opportunity that requires an outlay of $15 million and has a net present value of $2.5 million. At present, Sophie Pharmaceuticals has little spare cash or marketable assets, so if this investment is to be made it will need to be financed from external sources. The existence of this opportunity is not known to outsiders and is not reflected in the current share price. Should Sophie Pharmaceuticals make the new investment? If so, should the investment be made before or after the share market learns the true value of the company's existing assets? Should the investment be financed by issuing new shares or by issuing new debt?

Reference no: EM133018307

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