Debt Capacity Is Often Offered as a Reason for a Stock

question 26

Multiple Choice

Debt capacity is often offered as a reason for a stock price to decline when additional equity securities are issued.The primary reason that supports this argument is that:

• A)the high issue costs of a debt offering must be paid by the shareholders.
• B)an additional equity issue reduces the debt capacity of a firm.
• C)management feels the probability of default has risen,which limits the firm's debt capacity and thus an equity issue is necessary.
• D)unless additional debt is issued in the future,stock dividends will tend to decline after the new securities are issued.
• E)additional equity is only issued when a firm cannot meet its current debt obligations,thereby signaling the firm is on the verge of bankruptcy.

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Definitions:

Capitalized

In accounting, this term refers to recording an expense or cost as a capital asset on a balance sheet, rather than as an expense on the income statement.

Tangible Asset

Physical assets that can be touched and have a finite monetary value, such as buildings, machinery, and equipment.

Property, Plant, Equipment

Property, plant, and equipment (PP&E) are long-term tangible assets that are used in the operations of a business and are subject to depreciation.

Disposal

The process of disposing an asset by selling, exchanging, retiring it, or by destroying it.