CFA Practice Question

There are 151 practice questions for this study session.

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!?
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