Wanda’s Widgets, Inc., has a profitable new investment opportunity that it cannot fund internally, so it...
Wanda’s Widgets, Inc., has a profitable new investment opportunity that it cannot fund internally, so it would like to issue new equity or debt. Wanda, the CEO, prefers debt because she does not want to sell shares at the current stock price, which is $80 per share. In the opinion of Wanda, which of the following is the most likely “true value” per share of the stock? [In other words, what does the unwillingness of Wanda to issue equity signal about her opinion of the underlying value of the firm?]
A.
$70 (i.e. Wanda thinks that the shares are currently overvalued by the market).
B.
We can’t infer anything about Wanda’s opinion of the true value of the stock from this decision.
C.
$90 (i.e. Wanda thinks that the shares are currently undervalued by the market).
Homework Answers
The answer is
C.$90, i.e. Wanda thinks that the shares are currently undervalued by the market
Since the shares are undervalued, she does not want to issue shares at that price since proceeds will be lower than it should be
Had the shares been overvalued, she would have wanted to issue them
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