Asked by James Stupin on Jul 20, 2024
Verified
Which of the following is a reason why the stock price of a firm might drop when a seasoned equity issue is announced?
A) Managers know the stock is overvalued, so they are selling it while the price is low.
B) Issuing new equity may indicate the firm has too little debt or excess liquidity.
C) Stockholders are just acknowledging the fact that if the firm were to issue debt instead, existing shareholders would have to share the gain with the new investors.
D) It is expensive to issue securities and stockholders are just recognizing the loss in value the firm will incur by paying out this money.
E) There may be a simple supply and demand problem, that is, the additional share will be in great demand and price usually drops when demand rises.
Seasoned Equity Issue
The process by which a company that is already publicly traded issues additional shares to raise new equity capital.
Supply And Demand
The economic model that determines the price of anything in a market, based on the quantity of goods available and consumers' desire for them.
- Acknowledge the influence of securities issuance on the market value of a company's shares and grasp the results of pricing them too low or too high.
Verified Answer
TL
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Final Answer :
D
Explanation :
The correct answer is D because issuing new securities incurs costs such as underwriting fees and legal expenses, which can reduce the firm's value and thus its stock price.
Learning Objectives
- Acknowledge the influence of securities issuance on the market value of a company's shares and grasp the results of pricing them too low or too high.
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