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Vocus group, page-158

  1. 52 Posts.
    I think we largely agree (with a few caveats). In my view, you are correct that if :
    a) existing shareholders participate and/or
    b) expensive debt is raised (cost>returns on new asset), and
    c) the investment didn't generate returns above the weighted average cost of capital, then both new and existing shareholders pay the price of a 'bad investment'.

    A think what Bug1 might be getting at though relates to the following:
    When share price is high, the WACC (weighted average cost of capital actually comes down) for the company that is raising capital. That is because the equity risk premium required by Mr Market is lower (higher price implies new share purchasers see more growth/less risk). This means the 'hurdle rate' for any new investment is lower than it would otherwise be.

    I'm not arguing that Nextgen was a good investment, just that issuing shares (or trading them for another asset) when share price is high makes a lot more sense than raising capital by share issue when the share price is low.
 
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