Which of the following statements is NOT true?
A)If new equity shares are issued at a fair price then the existing shareholders should not suffer a negative impact.
B)Issuing equity automatically hurts existing shareholders.
C)If a firm takes on a positive NPV project financed with new equity,existing shareholders will benefit.
D)The cash flows from a new project should cover the return on new shares issued to pay for the project if the IRR exceeds the required rate of return.

Question

Quizplus · Accepted Answer

Issuing equity does not automatically hurt existing shareholders. If the new shares are issued at a fair price, the existing shareholders should not suffer a negative impact, and if the new equity is used to finance a positive NPV project, existing shareholders may benefit. The cash flows from a new project should cover the return on new shares issued to pay for the project if the IRR exceeds the required rate of return, so statement D is also true. However, statement B is false in that it presents an overly simplistic view of the impact of equity issuance on existing shareholders.

Which of the Following Statements Is NOT True