If Management Perceives the Current Market Equity Value of Their

question 50

Multiple Choice

If management perceives the current market equity value of their shares to be OVER valued,then management should:

• A)issue new shares later after stock prices have come down so as not to further increase the price dilution found when issuing shares.
• B)issue new shares now to take advantage of the market mispricing,but only if they believe the market is at least momentarily inefficient.
• C)wait to issue until prices are UNDER valued so that there option values increase more rapidly.However,they would only do this if they have the best interest of shareholders in mind.
• D)recommend that existing shareholders buy more shares at current market prices because they are so valuable.

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Definitions:

Risk-Free Asset

A theoretical financial instrument that offers guaranteed returns with no risk of financial loss, often represented by government bonds.

Strike Price

The price at which the holder of an option can buy (in a call option) or sell (in a put option) the underlying security.

Intrinsic Value

The actual value of a company or an asset based on underlying perception of its true value including all aspects of the business.

November 45 Call

A call option that gives the holder the right to buy a particular stock at a price of $45 per share, expiring in November.