13. 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...

13.

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?