Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Textbook Question
Chapter 20, Problem 12CQ
Seasoned Equity Offers What are the possible reasons why the stock price typically drops on the announcement of a seasoned new equity issue?
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In some cases, stock price decreases on the announcement of equity repurchases. How would you explain this?
The disposition effect:
a.
Is the tendency of stock investors to sell their winning stocks and hold onto their losing stocks
b.
Is consistent with regret avoidance behaviour
c.
Is a consequence of investors’ preference for lottery-type stocks
d.
(a) & (b)
e.
(a), (b) & (c)
Why is there a cost for retained earnings?
Group of answer choices
Earnings can be reinvested or paid out as dividends
Investors could buy other securities, earn a return
Neither
Either
Chapter 20 Solutions
Corporate Finance
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- Which of the following statement(s) is(are) TRUE? (i) The valuation price of a stock primarily depends on expected future dividends to its shareholders and its required rate of return. (ii) An investor who intends to sell a stock after holding it for a short period will forgo all future dividends, thus will be willing to pay for a lower price for the stock compared to another investor who prefers to hold the share for a longer period. (iii) The valuation share price is positively related to the share's required rate of return.arrow_forwardThe company must issue a new stock if the market value is less than intrinsic value, otherwise there is no need for a stock issuance. Select one: O True O False Next pagarrow_forwardEvaluate the following statement: When a firm pays dividend, its stock price decreases in the market. Therefore, it is always better to buy a stock on the date of dividend payment.arrow_forward
- Which of the following is true with Primary Market? Select one: a. Deals with old stocks issued by companies b. Provides liquidity for instruments which are already issued by companies c. Needs fixed place for trading d. None of the options e. Increases riskarrow_forward3) Understanding if a stock is undervalued or overvalued will influence if the investor will invest in the stock at the current moment of the analysis. T/Farrow_forwardWhich of the following will increase the price of a stock? Group of answer choices: A. Decrease in the required rate of return B. Decrease in the dividend growth rate C. Delay in the payment of dividends D. Decrease in earnings growtharrow_forward
- Which of the following events are likely to increase the market value of a calloption on a common stock? Explain.a. An increase in the stock’s priceb. An increase in the volatility of the stock pricec. An increase in the risk-free rated. A decrease in the time until the option expiresarrow_forwardA stock's internal rate of return (IRR) is the discount rate that cause the present value of future dividends and the price at which a stock is expected to be sold to equal the current price of the stock. O True O False Carrow_forwardxplain in words why new common stock thatis raised externally has a higher percentage costthan equity that is raised internally by retainingearnings.arrow_forward
- How would you use these to evaluate whether or not a current stock price is perhaps to high (overpriced) or too low (underpriced).arrow_forwardWhat impact do flotation costs have on the cost of common equity? Question 8 options: None. The cost of retained earnings and new stock must be the same since they both represent the same claim by shareholders. It makes new stock less expensive compared to retained earnings. It makes new stock more expensive compared to retained earnings.arrow_forwarda. What is the relationship between the expected return of a stock and its fair expected return? When is a stock underpriced, overpriced, or fairly priced?arrow_forward
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