18 Questions
What did the astute corporate treasurer emphasize as being more profitable for the company?
Good capital budgeting decisions
In what situation are suppliers of capital more willing to make funds available according to the text?
During economic downturns
What negative signal does the text mention about selling a new issue of stock?
It sends a negative signal to investors
What does the text suggest is a disadvantage of selling a new issue of stock for a mature company?
It can negatively impact the stock price
When are investors more willing to provide funds in exchange for a stronger position?
When times are bad
What was mentioned as a factor influencing the choice between equity and debt during good and bad times?
Sales stability
In the scenario described, why would Firm U want to sell stock rather than use debt to raise capital?
To avoid sharing potential losses with new investors.
Why does the text suggest that a firm with very favorable prospects should avoid selling stock?
To prevent new investors from sharing the benefits of the new product.
What is the main drawback for current stockholders (including managers) when a company sells stock according to the text?
They have to share the benefits of new products with new stockholders.
What is the primary reason given in the text for why a firm with unfavorable prospects would prefer financing with stock?
To avoid sharing potential losses with new investors.
What should Firm U do considering its situation, as discussed in the text?
Sell stock to shift some adverse consequences to new investors.
How does the scenario described suggest that selling stock can impact the return on investment for a company?
By leading to a decrease in investment return but avoiding bankruptcy.
What is the main implication of firms with extremely bright prospects preferring not to finance through new stock offerings?
They prefer to have a high reserve borrowing capacity.
How do sophisticated portfolio managers typically interpret the announcement of a stock offering?
As a signal of management's negative outlook on the firm's prospects.
Based on the text, what should an investor infer if a company plans to issue new stock?
The firm's management views its prospects negatively.
How do empirical studies support the implication that the price of a firm's stock will decline after announcing a new stock offering?
By confirming a negative correlation between stock price and new stock announcements.
Which factor plays a significant role in influencing firms with extremely bright prospects not to finance through new stock offerings?
Desire for a high reserve borrowing capacity
In light of the information provided, what would be the general expectation regarding the price of a firm's stock after it announces a new stock offering?
The price will decline as indicated by empirical studies.
Test your knowledge on financial strategies for corporations, including issuing common stock, retiring debts, and maintaining target capital structure. Explore concepts such as asymmetric information, signaling, and financial flexibility.
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