Everything else equal, if a firm with favorable future prospects raises funds by issuing new shares of common stock, _____.
A)its debt/assets ratio should increase
B)its marginal bankruptcy-related costs should increase
C)its retained earnings will increase immediately
D)its taxable income should decrease
E)the price of its stock will increase when future profits are realized by the firm

Question

Everything else equal, if a firm with favorable future prospects raises funds by issuing new shares of common stock, _____. 
A)its debt/assets ratio should increase
B)its marginal bankruptcy-related costs should increase
C)its retained earnings will increase immediately
D)its taxable income should decrease
E)the price of its stock will increase when future profits are realized by the firm

Quizplus · Accepted Answer

If a firm with favorable future prospects raises funds by issuing new shares of common stock, the price of its stock is likely to increase when those future profits are realized by the firm. This is because investors will price in the expected increase in profits into the stock price. None of the other options are directly related to the issuance of new shares of common stock in this situation.

Everything Else Equal, If a Firm with Favorable Future Prospects