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

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Debt capacity refers to the maximum amount of debt a company can take on without jeopardizing its ability to meet its financial obligations. If management believes that the probability of default has increased, they may be hesitant to take on more debt, which limits the company's debt capacity. In such a scenario, the company may choose to raise equity capital instead, which can result in a drop in stock value due to dilution of ownership. The other options (A and B) are incorrect because the high issue costs of a debt offering would not impact the stock price directly, and the priority position of equity remains unchanged regardless of whether the company issues more equity or not.

Debt Capacity Is Often Given as a Reason for the Value