ZuoTi.Pro
Question

​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).

business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

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

0 0
Add a comment
Know the answer?
Add Answer to:
​Wanda’s Widgets,​ Inc., has a profitable new investment opportunity that it cannot fund​ internally, so it...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • The company has the following market values of debt and equity: Market value of debt: $50...

    The company has the following market values of debt and equity: Market value of debt: $50 Market value of equity: $50 Therefore, the total market value of the assets is $100. The firm has 10 shares outstanding; therefore, the current price per share is $5. The managers are considering an investment project with an initial cost of 30. They believe that the project should be worth $40. The company announces that it will issue new common stocks to obtain $30....

  • Investment Theory: Assume corporate taxes as detailed in the following question: 6. An all-equity firm has...

    Investment Theory: Assume corporate taxes as detailed in the following question: 6. An all-equity firm has 155,000 shares of common stock outstanding, currently worth $20 per share. Its equity holders require a 20% return. The firm decides to issue $1 million of 10% debt and use the proceeds to repurchase common stock. The corporate tax rate is 30%. a. What is the market value of the firm before the repurchase? b. According to Modigliani-Miller, what is the market value of...

  • Stephenson Real State Recapitalization Case Study - Please help - see questions at the end

    Stephenson Real estate RecapitalizationStephenson Real Estate Company was founded 25 years ago by the current CEO, Robert Stephenson. The company purchases real estate, including land and buildings, andrents the property to tenants. The company has shown a profit every year for the past 18 years, and the shareholders are satisfied with the company’s management.Prior to founding Stephenson Real Estate, Robert was the founder and CEO of a failed alpaca farming operation. The resulting bankruptcy made him extremely averseto debt financing....

  • Kuhn Co. is considering a new project that will require an initial investment of $20 million....

    Kuhn Co. is considering a new project that will require an initial investment of $20 million. It has a target capital structure of 35% debt, 2% preferred stock, and 63% common equity. Kuhn has noncallable bonds outstanding that mature in five years with a face value of $1,000, an annual coupon rate of 10%, and a market price of $1,050.76. The yield on the company's current bonds is a good approximation of the yield on any new bonds that it...

  • Kuhn Co. is considering a new project that will require an initial investment of $20 million....

    Kuhn Co. is considering a new project that will require an initial investment of $20 million. It has a target capital structure of 45% debt, 4% preferred stock, and 51% common equity. Kuhn has noncallable bonds outstanding that mature in five years with a face value of $1,000, an annual coupon rate of 10%, and a market price of $1,050.76. The yield on the company’s current bonds is a good approximation of the yield on any new bonds that it...

  • Kuhn Co. is considering a new project that will require an initial investment of $4 million....

    Kuhn Co. is considering a new project that will require an initial investment of $4 million. It has a target capital structure of 35% debt, 2% preferred stock, and 63% common equity. Kuhn has noncallable bonds outstanding that mature in five years with a par value of $1,000, an annual coupon rate of 10%, and a market price of $1,050.76. The yield on the company's current bonds is a good approximation of the yield on any new bonds that it...

  • Kuhn Co. is considering a new project that will require an initial investment of $45 million....

    Kuhn Co. is considering a new project that will require an initial investment of $45 million. It has a target capital structure of 35% debt, 2% preferred stock, and 63% common equity. Kuhn has noncallable bonds outstanding that mature in 15 years with a face value of $1,000, an annual coupon rate of 11%, and a market price of $1,555.38. The yield on the company's current bonds is a good approximation of the yield on any new bonds that it...

  • The president and CFO of Spellman Transportation are having a disagreement about whether to use market...

    The president and CFO of Spellman Transportation are having a disagreement about whether to use market value or book value weights in calculating the WACC. Spellman's balance sheet shows a total of noncallable $45 million long-term debt with a coupon rate of 7.00% and a yield to maturity of 6.00%. This debt currently has a market value of $50 million. The company has 10 million shares of common stock, and the book value of the common equity (common stock plus...

  • Kuhn Corporation is considering a new project that will require an initial investment of $20,000,000. It...

    Kuhn Corporation is considering a new project that will require an initial investment of $20,000,000. It has a target capital structure consisting of 45% debt, 4% preferred stock, and 51% common equity. Kuhn has noncallable bonds outstanding that mature in five years with a face value of $1,000, an annual coupon rate of 10%, and a market price of $1,050.76. The yield on the company’s current bonds is a good approximation of the yield on any new bonds that it...

  • Digital Fruit is financed solely by common stock and has outstanding 37 million shares with a...

    Digital Fruit is financed solely by common stock and has outstanding 37 million shares with a market price of $10 a share. It now announces that it intends to issue $280 million of debt and to use the proceeds to buy back common stock. There are no taxes. a. What is the expected market price of the common stock after the announcement? b. How many shares can the company buy back with the $280 million of new debt that it...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT