Question

#5 True or False? The issuance of equity for a firm with various financing alternatives signals...

#5 True or False? The issuance of equity for a firm with various financing alternatives signals that the firm has unfavorable prospects which it wants to share with new shareholders according to the signaling theory of capital structure.

Homework Answers

Answer #1

Answer :- False

As per signalling theory of capital structure firm must use equity for their capital after then raise debt if it is not possible to raise equity on a reasonable terms because use of debts by the company signals to the investors that the future doesn't signals good for the company.

As there are two sources of finance and using the fund of its equity shareholders is always a cheaper and better source of finance in comparison to other alternatives of financing.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Repurchases give stockholders a choice to (buy or sell) their stock and realize their capital gains...
Repurchases give stockholders a choice to (buy or sell) their stock and realize their capital gains or keep their stock and receive future dividends. Repurchase transactions allow a firm to buy back stock that may be needed to fulfill obigations when employees exercise their stock options. This (saves or increases) the costs associated with issuing new shares. Repurchases allow a firm to buy back as much stock as it wants, at whatever price it wants, without affecting shareholders. This statement...
2. Robert Financing has two competing financing alternatives The Company Corp. A. Issue $ 5 million...
2. Robert Financing has two competing financing alternatives The Company Corp. A. Issue $ 5 million in common stock at $ 50 per share B. Issuing a straight bond at par value for the same amount as in B with a coupon rate of 10% C. The Company’s marginal tax rate is 30% D. The Company currently has 10 million shares of common stock outstanding Required: a. Which of the two financing options is better? Support your recommendation with numbers...
A firm has followed an historical pattern of raising its dividend by 5 to 7 percent...
A firm has followed an historical pattern of raising its dividend by 5 to 7 percent every year. However, at the annual meeting held today, the Board of Directors declared a dividend increase of 12 percent. The stock price rose after the announcement because: A. Of the tax preference argument. B. It is viewed as a positive signal about the firm’s future cash flows. C. Of the M&M dividend irrelevance argument. D. The share price would not increase because investors...
1. True or False When firm A firstly issued 1 million shares through IPO, firm A...
1. True or False When firm A firstly issued 1 million shares through IPO, firm A raised $10/share so it totally raised $10 million equity fund. Now the market price for firm A's stock is $50/share, so today firm A raises a total of $50 millions from shareholders. Explain. 2. Search online, list the 30 firms in DJIA with the industry each firm is in. 3. What is the trading hours of NYSE?
5. The cost of new common stock True or False: The following statement accurately describes how...
5. The cost of new common stock True or False: The following statement accurately describes how firms make decisions related to issuing new common stock. If a firm needs additional capital from equity sources once its retained earnings breakpoint is reached, it will have to raise the capital by issuing new common stock. False: Firms raise capital from retained earnings only when they cannot issue new common stock due to market conditions outside of their control. True: Firms will raise...
EXTERNAL EQUITY FINANCING Coastal Carolina Heating and Cooling Inc. has a 6-month backlog of orders for...
EXTERNAL EQUITY FINANCING Coastal Carolina Heating and Cooling Inc. has a 6-month backlog of orders for its patented solar heating system. To meet this demand, management plans to expand production capacity by 45% with a $15 million investment in plant and machinery. The firm wants to maintain a 50% debt level in its capital structure. It also wants to maintain its past dividend policy of distributing 50% of last year's net income. In 2016, net income was $5 million. How...
SOS Ltd is currently an all-equity firm and has a market value of $800,000. SOS is...
SOS Ltd is currently an all-equity firm and has a market value of $800,000. SOS is evaluating whether a levered capital structure would maximize the wealth of shareholders. The cost of equity is currently 15%. The new capital structure under consideration is an issue of $400,000 new perpetual debt with an 8% interest rate. There are currently 32,000 shares outstanding and a tax rate of 35% applies to this firm. If SOS finally changes to the new levered capital structure,...
X Ltd’s financing policy has established that the optimal capital structure is approximately 60% ordinary equity;...
X Ltd’s financing policy has established that the optimal capital structure is approximately 60% ordinary equity; 10% preferred equity and 30% debt. X marginal corporate tax rate is 40%. X needs to raise shs 600 million to finance a new project and has collected the following information: The current market price of common stock is shs 500 per share and the firm just issue shs 50 dividend per share. Dividends are expected to grow at a rate of 10% per...
Modular Mould Ltd’s capital structure currently comprises 40% debt and 60% equity, a combination which management...
Modular Mould Ltd’s capital structure currently comprises 40% debt and 60% equity, a combination which management deems to be optimal and hopes to maintain. Management is currently considering a $2 million expansion of its existing business, which is expected to generate a perpetual cash inflow of $220,000 in future. The prospects of this expansion look good and management is seriously looking at financing options for this expansion. The first option is a $2 million issue of new equity. The flotation...
An all equity firm is expected to generate perpetual EBIT of $100 million per year forever....
An all equity firm is expected to generate perpetual EBIT of $100 million per year forever. The corporate tax rate is 35%. The firm has an unlevered (asset or EV) Beta of 0.8. The risk-free rate is 4% and the market risk premium is 6%. The number of outstanding shares is 10 million. The firm decides to replace part of the equity financing with perpetual debt. 2) The firm will issue $100 million of permanent debt at the riskless interest...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT