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:

Engine Oil

A lubricant used in internal combustion engines to reduce wear, protect against corrosion, and keep the engine clean.

Manufacturer

A company or person that makes goods for sale, especially on a large scale involving complex processes.

Factory Overhead

The indirect costs associated with manufacturing, including but not limited to utilities, maintenance, and management salaries.

Product Cost

The total expense incurred to produce a product, including the costs of raw materials, labor, and overhead.