Spartan Corp. is a firm with no cash on hand but lots of great ideas. The firm c

Question

Spartan Corp. is a firm with no cash on hand but lots of great ideas. The firm currently has 100,000 shares outstanding. All of these shares are held by the firm's founders, executives, and employees. The management of Spartan Corp. believes that if they can raise $2 million in cash to fund promising projects, the firm will be worth $10 million. If they cannot raise this cash, they will sell the firm to an acquirer who is offering $6 million for the firm's assets. If Spartan raises $2 million in equity financing by selling new shares, what is the lowest stock price that Spartan management would be willing to accept for these new shares?

Explanation / Answer

Answer:

The management of Spartan Corp. believes that if they can raise $2 million in cash to fund promising projects, the firm will be worth $10 million.

Value of current 100000 shares = $6 million

Current value per share = $6000000/100000 = $60 per share

Hence after issuing new shares current shareholders need at least $60 value

Let

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