• Whether to raise additional equity capital by issuing new shares of common stock. New issues of
common stock, of course, have the effect of diluting earnings per share and ROE and should be done
cautiously and infrequently. Nonetheless, from time to time, you and your co-managers may determine
that the company needs to raise additional equity capital to (1) help pay down a portion of the
outstanding loans (because of burdensome interest costs or because lowering debt is the best way to improve the company’s credit rating) or (2) help pay for capacity expansion and/or plant upgrades.
The company’s board of directors has established a 40-million share maximum on the total number of
shares outstanding and a 5-million share maximum on the number of shares that can be issued in any
one year (assuming the company is in good financial shape). The company cannot issue new shares
in the same year that it elects to buy back and retire outstanding shares. At the end of Year 10 the
company had 10 million shares outstanding. Each time you make an entry in the decision box
specifying how many shares are to be issued, there are accompanying on-screen calculations showing
the total amount of new equity capital raised (see the cash inflows section) and the price at which
investors will agree to buy the newly-issued shares (the price declines as more shares are issued
because additional shares dilute earnings per share). In deciding how many shares to issue, you can
try several “what if” entries and check out the effects on earnings per share, return on equity, and the
amount of money raised.
• Whether to raise additional equity capital by issuing new shares of common stock. New issues of
common stock, of course, have the effect of diluting earnings per share and ROE and should be done
cautiously and infrequently. Nonetheless, from time to time, you and your co-managers may determine
that the company needs to raise additional equity capital to (1) help pay down a portion of the
outstanding loans (because of burdensome interest costs or because lowering debt is the best way to improve the company’s credit rating) or (2) help pay for capacity expansion and/or plant upgrades.
The company’s board of directors has established a 40-million share maximum on the total number of
shares outstanding and a 5-million share maximum on the number of shares that can be issued in any
one year (assuming the company is in good financial shape). The company cannot issue new shares
in the same year that it elects to buy back and retire outstanding shares. At the end of Year 10 the
company had 10 million shares outstanding. Each time you make an entry in the decision box
specifying how many shares are to be issued, there are accompanying on-screen calculations showing
the total amount of new equity capital raised (see the cash inflows section) and the price at which
investors will agree to buy the newly-issued shares (the price declines as more shares are issued
because additional shares dilute earnings per share). In deciding how many shares to issue, you can
try several “what if” entries and check out the effects on earnings per share, return on equity, and the
amount of money raised.
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