Debt Capacity Is Often Given as a Reason for the Value

question 49

Multiple Choice

Debt capacity is often given as a reason for the value of the stock falling when equity is issued. The reason for this is:

• A) the high issue costs of a debt offering must be paid by the shareholders.
• B) the priority position of the equity is lowered.
• C) management has information that the probability of default has risen, limiting the debt capacity and causing the firm to raise equity capital.
• D) All of these.
• E) None of these.

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Definitions:

Inelastic Demand

A situation in which demand for a good or service is barely affected by changes in price.

Elastic Demand

When consumer demand for a product significantly rises or falls following a small change in its price.

Price Discrimination

The practice of selling the same product to different buyers at different prices, based on factors other than cost.

Consumer Surplus

The difference between the total amount consumers are willing to pay for a good or service and the actual amount they pay.