Question

1.

The lower the ____________, the greater is the share price _________ of a rights offering.

Select one:

a. ex-rights price; decline

b. rights-on price; decline

c. subscription price; decline

d. ex-rights price; increase

e. subscription price; increase

2.

We can consider a firm’s capital restructuring decisions in isolation from its investment decisions because

Select one:

a. investment decisions affect operations while capital restructuring decisions affect financing decisions.

b. a company’s assets are not directly affected by capital restructuring decisions.

c. investment decisions and capital restructuring decisions are mutually exclusive.

d. investors demand a separation of these two decisions due to agency conflicts.

e. investment and capital restructuring decisions use different sets of criteria and discount rates.

Answer 1

1)

Overall Market Value of the Company does not change. Therefore, lesser the money received from the rights issue, lower will be the share price after the issue in order to maintain the same market cap.

Therefore, (c) subscription price; decline

2)

Capital Structure Decisions are taken based on Cost of Capital of different sources of Capital.

Based on Cost of Capital of different sources and their weights, Weighted Average Cost of Capital is calculated.

Based on Weighted Average Cost of Capital, Investing Decisions are taken.

Therefore, Based on Above, (e) Both use different set of criterias and discount rates.