Assume that the CEO is firmly in charge of a $100 million firm. The CEO finds a new project that costs $30 million and returns $25 million next year. The CEO can only raise equity to fund this project.
(a) Is it possible that the CEO wants to take such a project?
(b) If the CEO does take this project, what will happen to the voting power of the existing shareholders?
(c) Would existing shareholders be better off if the CEO were to finance this new project with debt instead of equity?
(d) Does the need to raise equity always impose a "capital market discipline" on the CEO?
(e) Under what circumstances could the need to raise equity impose a "capital market discipline" on the CEO?