Which of the Following Is a Reason Why Firms Do

question 37

Multiple Choice

Which of the following is a reason why firms do not tend to issue new shares of common stock to fund new projects?

• A) Raising new capital via equity may send a unintended negative signal to the market.
• B) Issuing new equity dilutes a manager's ownership stake in the firm (unless they purchase at least an equal proportion of the new shares as they currently own).
• C) By rationing capital senior managers hope to weed out investments with an optimistic bias built into the cash flow projections.
• D) All of the above are reasons.
• E) Only (b) and (c) are reasons.

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Definitions:

Maturity

The date on which the principal amount of a bond, loan, or other financial instrument becomes due and is to be paid in full.

Marking To Market

The process of updating the value of a financial instrument to reflect its current market value, rather than its purchase price or book value.

Daily Settlement

The process of reconciling buy and sell positions in futures and options markets at the end of each trading day based on the closing market prices.

Futures Positions

Futures positions are commitments to buy or sell a specified amount of a commodity, currency, or financial instrument at a specified price on a set future date.