- CFA Exams
- CFA Level I Exam
- Study Session 7. Corporate Finance (1)
- Reading 20. Capital Structure
- Subject 2. Other capital structure theories
CFA Practice Question
Managers choosing to raise capital through the issuance of issue equity as opposed to debt are
A. likely to send a signal the market the stock is under-priced.
B. likely to send a signal the market the stock is over-priced.
C. likely to send a signal to the market that future earnings prospects are bright.
Explanation: Managers choosing to raise capital through the issuance of issue equity as opposed to debt are likely to send a signal the market the stock is over-priced.
User Contributed Comments 5
| User | Comment |
|---|---|
| murli | Signalling theory says issue of shares sends signal that prospects are not bright, so where does overpricing signal comes? |
| kyhooney | The fact that the company has a gloomy future show that the stock is overpriced,when outsider don't know the fact. |
| lemec | Current stock prices should reflect future earnings prospects. If those prospects are not good (only the insiders have this info), the price of the stock is overpriced. |
| dema | The question in hinting at the fact that managers are unable to raise the capital with low-cost debt. If they were able to, the managers would issue debt so as not to dilute their EPS. Thus, issuing additional stock is not as desirable as debt; stock price will be diluted, i.e. it is currently overpriced. |
| somk | Dema, come again!? |