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Carnival Cruise Line announces a stock offering on April 2. The offering price for its shares...

Carnival Cruise Line announces a stock offering on April 2. The offering price for its shares is $8.0, 9% below the price of $8.8 just prior to the announcement. United Airline Inc. on April 21 announces a stock offering to the public. The offering share price is $26.5, a 5% discount from the share price just before the announcement. These “underpricings” or price discounts in stock offerings are consistent with which one of the capital structure theories? (A) Market Conditions, (B) Trade off, (C) Pecking Order.

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Answer #1

Underpricing is related to one of the basic features of initial public offer which is related to to market conditions theory. This theory relates to prevalent conditions in the stock market under which an initial public offer is to be issued. Underpricing related to market dynamic approach.

trade off theory is a theory of deciding the optimum capital structure while packing order is a theory for also deciding the optimum capital structure by focusing on internal source of financing.

So the correct answer would be option( a) market conditions theory

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