Question

Suppose that if ist issues equity, the share price will remain at $9.25. To maximize the long-term share price of the firm once its true value is known, would managers choose to issue equity or borrow the $500 million. They know the correct value of the shares is $7.25? (Select the best choice below.)

A. Managers should issue equity for$500 million.
B. Managers should borrow the $500 million.
C. Suppose that if IST issues equity, the share price will remain $9.25.

Answer 1

Managers should choose to issue equity to maximize the long-term share price of the firm.

Step-by-step explanation:

To maximize the long-term share price of the firm once its true value is known, managers should choose to issue equity rather than borrowing the $500 million. When a firm issues equity, it sells ownership of the company to the public and becomes responsible to a board of directors and shareholders. By issuing equity, the firm can raise the necessary capital without committing to scheduled interest payments and maintain control of its operations.