Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Textbook Question
Chapter 14.4, Problem 2CC
True or False: When a firm issues equity, it increases the supply of its shares in the market, which should cause its share price to fall.
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Why is the cost of retained earnings cheaper than the cost of issuing new common stock?
Group of answer choices
Issuing new common stock may send a negative signal to the capital markets, which may depress the stock price.
When a company issues new common stock they also have to pay flotation costs to the underwriter.
Either
Neither
Explain the effect of D/E on asset returns, equity returns (assuming that cost of debt is not affected), asset beta and equity beta (assuming that debt beta is zero). Should an investor choose to invest in a stock of a company with high or low D/E, or why expected returns on these stocks are equivalent, although they are not equal?
Financial risk refers to the:
Multiple Choice
possibility that interest rates will increase.
risk of owning equity securities.
the risk that the share price may not reflect all known information
general business risk of the firm.
risk faced by equity holders of firms with debt.
Chapter 14 Solutions
Corporate Finance
Ch. 14.1 - How does the risk and cost of capital of levered...Ch. 14.2 - Why are investors indifferent to the firms capital...Ch. 14.2 - What is a market value balance sheet?Ch. 14.2 - In a perfect capital market, how will a firms...Ch. 14.3 - How do we compute the weighted average cost of...Ch. 14.3 - With perfect capital markets, as a firm increases...Ch. 14.4 - If a change in leverage raises a firm's earnings...Ch. 14.4 - True or False: When a firm issues equity, it...Ch. 14.5 - Consider the questions facing Dan Harris, CFO of...Ch. 14.5 - Prob. 2CC
Ch. 14 - Consider a project with free cash flows in one...Ch. 14 - You are an entrepreneur starting a biotechnology...Ch. 14 - Acort Industries owns assets that will have an 80%...Ch. 14 - Wolfrum Technology (WT) has no debt. Its assets...Ch. 14 - Suppose there are no taxes. Firm ABC has no debt,...Ch. 14 - Suppose Alpha Industries and Omega Technology have...Ch. 14 - Prob. 7PCh. 14 - Prob. 8PCh. 14 - Zetatron is an all-equity firm with 100 million...Ch. 14 - Explain what is wrong with the following argument:...Ch. 14 - Prob. 11PCh. 14 - Hardmon Enterprises is currently an all-equity...Ch. 14 - Prob. 13PCh. 14 - Prob. 14PCh. 14 - Prob. 15PCh. 14 - Hartford Mining has 50 million shares that are...Ch. 14 - Mercer Corp. has 10 million shares outstanding and...Ch. 14 - Prob. 18PCh. 14 - Prob. 19PCh. 14 - Prob. 20PCh. 14 - Prob. 21PCh. 14 - Prob. 22PCh. 14 - Prob. 23P
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Since stock represents ownership in the company, equity investing is less risky than debt investing, and as such we can expect lower returns. t/f?arrow_forwardWhich one of the following statements concerning financial leverage is correct? A) Financial leverage magnifies both profits and losses. B) Financial leverage increases profits and decreases losses. C) Financial leverage has no effect on a firm's return on equity. D) Increasing financial leverage will always decrease the earnings per share. F) Financial leverage refers to the use of common stock.arrow_forwardWhich of the following statements is NOT true? A. Stock owners benefit from stock price increases B. Higher stock prices allow companies access to more capital C. Common stocks are not securities D. Stock prices tend to be very volatilearrow_forward
- Which one of the following action will not lead to reducing financial risk? Issuing bonus shares Issuing equity shares Issuing preferred stock Reducing dividendarrow_forwardExplain why the following statement is wrong: “The stock price is equal to the value of equity, divided by shares outstanding. Therefore, companies should avoid issuing equity because the number of shares outstanding goes up and thus the stock price would decrease."arrow_forward6. What signal is sent to the market when a firm decides to issue new stock to raise capital? a. Bond markets are overpriced. b. Stock price is too low. c. Bond markets are underpriced. d. Stock price is too high.arrow_forward
- A firm is planning to issue bonds to make an equity repurchase to increase its stock price. It is basing its analysis on the fact that there will be fewer shares outstanding after the repurchases, and higher earnings per share. Will the higher earnings per share always translate into a higher stock price? a. No b. Depends on stock price c. Yes d. Indifferentarrow_forwardTotal leverage is a measure of total risk: it measures how earnings per share will change with a change in sales. True False Investors buy preferred shares as oppoised to common shares because they expect to profit from a price rise in the value of the shares. O True Falsearrow_forwardWhich of the following statements concerning common stock and the investment banking process is NOT CORRECT? a. The preemptive right gives each existing common stockholder the right to purchase his or her proportionate share of a new stock issue. b. The announcement of a large issue of new stock could cause the stock price to fall. This loss is called "market pressure," and it is treated as a flotation cost because it is a cost to stockholders that is associated with the new issue. c. If a firm sells 1,000,000 new shares of Class B stock, the transaction occurs in the primary market. d. Listing a large firm's stock is often considered to be beneficial to stockholders because the increases in liquidity and reputation probably outweigh the additional costs to the firm. e. Stockholders have the right to elect the firm's directors, who in turn select the officers who manage the business. If stockholders are dissatisfied with…arrow_forward
- TRUE or FALSE: Managers always attempt to maximize the long-run value of their firms' stocks, or the stocks' intrinsic values. This is exactly what stockholders desire. Thus, conflicts between stockholders and managers are not possible.arrow_forwardThe bird-in-the-hand argument espousing the importance of dividends or dividend relevance suggests that investors view a current (certain) dividend as less risky than future (uncertain) dividends or capital gains; nevertheless, proponents of this theory argue that this will have no significant impact on share price. Is this true or falsearrow_forwardWhich statement about book value per share (BVPS) is true???A. Market price per share usually approximates BVPS.B. BVPS can be misleading because it is based onhistorical cost.C. Market price per share greater than BVPS is anindication of an overvalued stockD. BVPS is the amount that would be paid to shareholdersif the firm is sold to another firmarrow_forward
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