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

Issuance of additional share in order to fund periods products can not always go in line with the market expectation because markets are not always expecting that additional shares are to be issued, it may mean that the company is losing the control and the overall outstanding share in the markets are increasing and it will be leading to loss of the earning per share.

So it can be said that even if the the project has been selected which is yielding net present value of positive figures,t value of of company has fallen in the stock market because-

A. Additional stock issuance will be seen as dilution of the overall control of the company

B. It will be also seen as lowering the Earning per share due to high amount of shares in the market.