Question

Judy plc, a manufacturer of automobile tyres, has recently discovered a new type of material which has an improved grip. The company is concerned that if its competitors gain knowledge of this discovery they will quickly incorporate the material into their own tyres, hence Judy does not wish to announce the discovery until they have started production.

Judy's shares currently trade at £9 per share but the company expects the share price to increase to £14 when the market learns about the new material. Judy has 1 million shares in issue. The company is currently considering investing in a project which costs £1.8 million and has a net present value of £1.2 million but can only finance the project using a new issue of equity. The current share price reflects the project's net present value of £1.2 per share.
Required
a) ) Calculate how many shares will the company need to issue to raise £1.8
b) What will the share price be if the company undertakes the project and the market learns about the new material?
c) What will the share price be if the company does not undertake the project?

Answer 1

Judy plc will need to issue 200,000 shares to raise the required £1.8 million. If the project is undertaken and the market learns of the new material, the share price will increase to £14. Without the project, the share price remains at £9.

Step-by-step explanation:

To address the student's question concerning Judy plc, a tyre manufacturer, we have three parts to solve based on the provided scenario:

1. Calculate the number of shares to be issued to finance a £1.8 million project.
2. Calculate the new share price if the company undertakes the project and the market learns of the new material.
3. Calculate the share price if the company does not undertake the project.

To calculate the number of shares needed to raise £1.8 million, we divide the total amount needed by the current share price:

Shares to issue = Total amount needed / Current share price

Shares to issue = £1.8 million / £9 per share

Shares to issue = 200,000 shares

For the new share price after undertaking the project and assuming market learns about the new material:

New market cap = (Current share price + Increase in share price) x (Current number of shares + New issued shares)

New market cap = (£9 + £5) x (1,000,000 + 200,000)

New market cap = £14 x 1,200,000

New market cap = £16.8 million

New share price = New market cap / Total number of shares post-issue

New share price = £16.8 million / 1,200,000

New share price = £14

If the company does not undertake the project, the share price remains at the current level of £9 per share.