Which of the following statements is true?
A) In recent years external equity has been a large percentage of total sources of financing even though this is, by far, the most expensive source of financing.
B) In recent years external equity has been a large percentage of total sources of financing. Some argue that this relationship exists because financial managers think stock prices are too high.
C) In recent years external equity has been a small percentage of total sources of financing even though this is, by far, the cheapest source of financing.
D) In recent years external equity has been a small percentage of total sources of financing. Some argue that this relationship exists because financial managers think stock prices are too low, even though this is inconsistent with efficient markets.
E) In recent years external equity has been a small percentage of total sources of financing in part because of the legal reserves that the firms must hold against equity.

Question

Quizplus · Accepted Answer

External equity has indeed been a small percentage of total sources of financing in recent years. This is often attributed to financial managers' perception that stock prices are undervalued, which suggests a cautious approach to issuing new equity. This perspective can seem inconsistent with the efficient market hypothesis, which posits that stock prices at any given time fully reflect all available information.

Which of the Following Statements Is True