Question

On average, how does the market interpret seasoned equity offerings (SEO)? A. The company must have positive NPV projects and need financing to take the project. Therefore it is good news. B. Since the firm will be less leveraged, the required return on the stock is lower, and thus the price should increase C. The manager thinks the company is not worth the current traded price. That is why the company issues share, and therefore it is bad news. D. There are no discernable . There are no discernable patterns regarding market's reaction on SEOs.

Answer 1

Seasoned equity offering is the issue of a new equity by the company. A company may opt for Seasoned Equity Offering (SEO) when the company intends to carry out new operations or expand the business operations. This is a good sign. Among the 4 options given, the correct answer is option (a). The company must have positive NPV projects and need financing to take the project. This is a good news. The other 3 options are incorrect. The market generally interprets that the company requires money for new projects and this is obtained from the seasoned equity offering.