Company X has an investment project requiring a $10m investment
today and that has a
$1m net present value. The company has 1 million shares, no
internal funds and, given the
nature of its business, cannot get debt financing. Hence it must
raise funds by issuing equity
or abandon the project. While the market knows all about the
investment project, it does
not know whether the value of the company’s existing assets
(i.e., excluding the new
project) is $10m or...