Question

A whole equity finance firm ABC's market value is one of $100, $80 or $60. Only...

A whole equity finance firm ABC's market value is one of $100, $80 or $60. Only firm manger knows the true value. Outside investors therefore place equal weights on

each possibility; hence the current equity price is $80. The firm CEO wants to sell some fraction of his shares in the market. Upon the announcemnt, what would

be the market price of equity?

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Answer #1

Stock prices change everyday by market forces. By this we mean that share prices change because of supply and demand. If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall.

In the given question it is given that the expected market price per share of outside investors is $ 80. Further the CEO of the firm wants to sell some of his shares in the market. So the investors would buy these shares only if he sells @ $ 80 or below $ 80.

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