Hey Professor,
I don't understand how the "new equity" remains 10M and is the number of shares that decreases.
Thanks in advance
Equity starts being 10M
There is a new project that brings 2M
Therefore, the firm value is 12M
Debt is 2M, hence equity is 10M
There is a new project that brings 2M
Therefore, the firm value is 12M
Debt is 2M, hence equity is 10M
but if the shares are repurchased, shouldnt the value of E account with that?
It does. If the project had an NPV of 0, then equity would have been 9 and not 10. It just coincides that the NPV equals the value of the shares repurchased
so let's say the project would have an NPV = 2 instead of = 1, firm value would've been 13, then the debt is still 2, so E is 11?