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In: Finance

?Zelnor, Inc., is an? all-equity firm with 180 million shares outstanding currently trading for $ 11.52...

?Zelnor, Inc., is an? all-equity firm with 180 million shares outstanding currently trading for $ 11.52 per share. Suppose Zelnor decides to grant a total of 18 million new shares to employees as part of a new compensation plan. The firm argues that this new compensation plan will motivate employees and is better than giving salary bonuses because it will not cost the firm anything. Assume perfect capital markets. a. If the new compensation plan has no effect on the value of? Zelnor's assets, what will be the share price of the stock once this plan is? implemented? b. What is the cost of this plan for Zelnor? investors? Why is issuing equity costly in this? case?

a. If the new compensation plan has no effect on the value of? Zelnor's assets, what will be the share price of the stock once this plan is? implemented? If the new compensation plan has no effect on the value of? Zelnor's assets, the new share price will be ?$____ . ? (Round to the nearest? cent.)

b. What is the cost of this plan for Zelnor? investors? Why is issuing equity costly in this? case? The cost to investors is ?$____ million. ? (Round to the nearest? million)

Why is issuing equity costly in this? case? ? (Select the best choice? below.)

A. It only appears costlylong dash the value of the firm as a whole is unchanged. B. ?It's costly because the shareholder equity is being given away to employees for free. C. It is not costly because we are not taking into account the benefit of the equity to the employees. Once that is accounted? for, the value of the firm will be the same. D. This is a standard example of the effect of dilution on the share price which is always costly.

Expert Solution

Answer a:

Given,

Current shares outstanding = 180 million

Current trading price of share = $11.52

As such, value of Zelnor = 180 million * $11.52 = $2,073.6 million.

Given that new compensation plan has no effect on the value of Zelnor's assets,

Post issue of 18 million shares to employees, total outstanding shares = 180 + 18 = 198 million

Share price of the stock once this plan is implemented = $2,073.6 million / 198 million = $10.47

Hence,

If the new compensation plan has no effect on the value of Zelnor's assets, the new share price will be $ 10.47

Answer b:

Cost of this plan for Zelnor investors = Current number of shares outstanding * (Current share price - share price post implementation of plan)

= 180 million ($11.52 - $10.47) = $189 million

The cost to investors is $189 million.

Why is issuing equity costly in this case?

Correct choice is:

B. It's costly because the shareholder equity is being given away to employees for free.

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?Zelnor, Inc., is an? all-equity firm with 180 million shares outstanding currently trading for $ 11.52...

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