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  3. firm ccc has no debt. existing assets generate ear

Firm CCC has no debt. Existing assets generate earnings of $20mil. per year forever. Discount...

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Finance

Firm CCC has no debt. Existing assets generate
earnings of $20mil. per year forever. Discount
rate=10%. Firm has n shares (5 mil.) currently
selling at P=$40 per share. Now firm plans to invest
I=$40mil. in new project. Project will generate $5
mil. in new earnings per year forever. Firm will issue
new shares to fund this new project.
a. In an efficient capital market, what is the price
that new shareholders are willing to pay for each
share of Firm CCC'stock? What is the gain by
existing shareholders?
b. Suppose market is inefficient and new shares can
be sold for $45, what is the gain/loss by new
shareholders from purchasing these new shares?

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