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Question 24 12 pts Please answer the following: A. Under market signaling theory, describe what signal (and why) a corporatio
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Answer #1

A. Essentially debt is considered a fixed obligation without diluting the company ownership. However it riskier for the company as it involves guaranteed interest payment. So when the company goes for issuing shares the signal could be that instead of fixed & assured return, the company is more comfortable in sharing the ownership. (In an extreme case, the company can delay the dividend payment)

Also, this shows the strategic goals of the company that it believes in safely operating and being stable rather than aggressive. Also if the debt portion goes on increasing the interest rate of borrowing might also increase, thereby affecting the business operating cost.

B. The corporation share price would increase initially as the bullish sentiment would prevail. However, this should be followed by goods news maintaining positive sentiment overall.

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