Which of the following statements is TRUE?
A)Issuing equity automatically hurts existing shareholders.
B)Equity is less expensive than debt because of the dividend tax shield found with equity.
C)If a firm takes on a positive NPV project financed with new equity,existing shareholders will benefit.
D)All of the above are true.

Question

Quizplus · Accepted Answer

Issuing equity does not automatically hurt existing shareholders, as the benefits of the new projects can outweigh the dilution effect. Equity is not necessarily less expensive than debt, as the cost of equity can be higher than the cost of debt. However, if a firm takes on a positive NPV project financed with new equity, existing shareholders will benefit as the value of their shares will increase.

Which of the Following Statements Is TRUE