Which of the following is a reason for a firm to underprice new issues?
A) When the market is in equilibrium, additional demand for shares can be achieved only at a higher price.
B) When additional shares are issued, each share's percent of ownership in a firm is diluted, thereby justifying a higher share value.
C) When additional shares are issued, each share's percent of ownership in a firm is concentrated, thereby justifying a lower share value.
D) When the market is in equilibrium, additional demand for shares can be achieved only at a lower price.

Question

Quizplus · Accepted Answer

Underpricing new issues can create additional demand for shares at a lower price than in equilibrium. This can help the firm to sell more shares and raise more capital.

Which of the Following Is a Reason for a Firm