4. Consider a publicly held firm with 1 million shares of common stock, each priced at $35. If the replacement value of this firm’s capital stock is $50 million, should it acquire any new capital? Why or why not? How would your answer change if the price of this company’s stock rose to $80 per share?
When stocks prices of a company is underpriced, such company should not go for acquistion of capital.
In the first scenario, the market value of company = 1 mill* $35 = $ 35 mill.
The replacement value or net worth of the company = $50 mill.
Hence, the company should not acquire any new capital.
Reason- Such acquisition would result any issue of increased no.of
shares for a lower price. Hence, it would largely benefit the
investors alone and not the company.
In the second scenario, the market value of company = 1 mill* $80 = $ 80 mill.
The replacement value or net worth of the company = $50 mill.
Hence, the company should acquire any new capital.
Reason- Such acquisition would result any issue of fewer no.of
shares for a higher price. Hence, it would largely benefit the
company.
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