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Question
Which of the following statements is correct?
a. If the demand curve for a firm's stock is relatively flat, the firm will have a more difficult time raising a large amount of new equity funds for expansion than would be true if the demand curve were steeper.
b. Flotation costs to raise a given amount of funds would, typically, be smaller under a best-efforts arrangement than with an underwritten offering, and the corporation is also more certain of getting the needed funds under a best-efforts offering. This is why best-efforts deals are most common.
c. Par value is not necessarily the actual price at which stock is issued by the firm, but it does constitute the maximum legal liability per share in the event of bankruptcy. Thus, if a firm sold $5 par stock to investors at $30 per share, in the event of bankruptcy the firm would have to pay the stockholders no more than $5 per share.
d. The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any additional shares sold by the firm. This right protects current stockholders against both dilution of control and dilution of value.
e. One of the legal rights that often goes with common stock is the preemptive right. This is the right of present stockholders to purchase their "proportional share" of all new securities that might be issued by the firm, including common and preferred stock, and all types of debt.
Answer
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