Why is issuing equity costly in this? case

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Reference no: EM132064978

Zelnor, Inc., is an? all-equity firm with 140 million shares outstanding currently trading for $7.04 per share. Suppose Zelnor decides to grant a total of 14 million new shares to employees as part of a new compensation plan. The firm argues that this new compensation plan will motivate employees and is better than giving salary bonuses because it will not cost the firm anything. Assume perfect capital markets.

(A). If the new compensation plan has no effect on the value of? Zelnor's assets, what will be the share price of the stock once this plan is? implemented?

If the new compensation plan has no effect on the value of? Zelnor's assets, the new share price will be ?$_______(Round to the nearest? cent.)

(B). What is the cost of this plan for Zelnor? investors? Why is issuing equity costly in this? case?

The cost to investors is ?$______million. ? (Round to the nearest? million) Why is issuing equity costly in this? case? ? (Select the best choice? below.)

(C). Why is issuing equity costly in this? case? ? (Select the best choice? below.)

A.It is not costly because we are not taking into account the benefit of the equity to the employees. Once that is accounted? for, the value of the firm will be the same.

B. ?It's costly because the shareholder equity is being given away to employees for free.

C. This is a standard example of the effect of dilution on the share price which is always costly.

D. It only appears costlylong dash-the value of the firm as a whole is unchanged.

Reference no: EM132064978

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