Debt capacity is given as a reason when the value of the equity falls when equity is issued.The reason for this is:

Question

Quizplus · Accepted Answer

When a firm's debt capacity is limited due to an increased probability of default, the firm may choose to raise equity capital to maintain financial stability. This can lead to a decrease in the value of existing equity when the new shares are issued. Option A is incorrect because issue costs are typically higher for debt offerings than equity offerings. Option B is incorrect because equity holders do not have a priority position in the capital structure. Option D is incorrect because only option C correctly explains the reason for the decrease in equity value. Option E is also incorrect because none of the options provide a complete explanation.

Debt Capacity Is Given as a Reason When the Value