Question

Miller Tool is a successful manufacturer of both consumer and industrial hand tools and is publicly owned. The firm has several positive net present value projects that it would like to pursue and thus decided to issue additional shares of common stock. As a result of this stock issue, the firm's stock price declined. Explain why this occurred when the proceeds of the issue are being used to fund positive net present value projects.

Answer 1

When the company is already listed into the stock market and it has issued additional number of common stock it will mean that the company is trying to dissolve the additional equity and it would not be taken in a good light by the shareholders who are existing shareholders of the company and additional issue of shares when floated into the market will also mean that it will be reducing the overall Earning per share of the company because of larger number of outstanding stock which are floated into the market.

It will lead to decrease in the Earning per share and it will also lead to provide the shareholder with an indication that the company do not want to keep the control of its shares and it is trying to dissolve its stake in the company so they are trying to increase the ownership of the company and they are not trying to take the debt capital and instead they are highly conservative by issuance of the equity capital so it will lead to decrease in the share price as these additional issues has not been discounted in good manner.