If a firm with favorable prospects sells new shares, _____.
A) the debt/assets ratio of the firm will increase
B) the marginal bankruptcy-related costs of the firm will increase
C) the retained earnings of the firm will decrease
D) the tax payable by the firm will decrease
E) the value of the firm's stock will decrease.

Question

Quizplus · Accepted Answer

Issuing new shares can lead to stock dilution, which may decrease the value of existing shares if the market perceives the issuance as a sign that the stock is overvalued or if the new capital is not used effectively.

If a Firm with Favorable Prospects Sells New Shares, _____