If a firm with favorable prospects sells new shares A the r

If a firm with favorable prospects sells new shares, _____.

A. the retained earnings of the firm will decrease

B. the debt/assets ratio of the firm will increase

C. the tax payable by the firm will decrease

D. the marginal bankruptcy-related costs of the firm will increase

E. the value of the firm\'s stock will increase.

Solution

Correct option is > E. the value of the firm\'s stock will increase.

If a company with favorable prospect sells shares that would be increase the stock price in market because added equity gives scope of more leverage and favorable prospect firm can invest more and optimize the returns and the stock prices will increase.