Why does the ceos concern make sense

Reference no: EM133332136

Question: A firm is evaluating a project that concerns doubling production capacity. The firm's current earnings are $10 million per year. The project will take three years to finish and will increase earnings to $20 million per year afterwards. The project needs to be financed by issuing equity today. The firm has 1 million shares outstanding. Funding the project requires issuing 250,000 shares. The CEO says he is against funding the project. In his words: "Issuing equity to fund this project will increase the number of shares outstanding from 1 million to 1,250,000, and thus reduce our earnings per share from $10 to $8, a reduction of 20% in earnings per share. This will depress our stock price." Does the CEO's concern make sense?

Reference no: EM133332136

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