Question

1) Firm A announced that it will issue equity and repay debs maturing next year. What do you expect about the market reaction to this announcement? provide reasons for your conjecture.

Answer 1

This would have a positive reaction in the market & the stock should rise in a short term on the back of this news. Issuing new equity either to repay debt or to improve company performance is considered to be a positive news for all stakeholders. In this case, company will repay the debt hence it'd save itself from interest payments which in turn would increase the company's future earnings & might lead to higher dividend to equity shareholders.

P.s if this equity was issued without citing a purpose (of debt repayment/improve company performance) then it'd have been seen as a negative impression as it'd dilute the stock value for existing shareholders & might lead to sell off, if the company is struggling financially.