If a US listed company announces a big issuance of new common stock, will the demand...

If a US listed company announces a big issuance of new common stock, will the demand curve be downward-sloping? Will the demand curve shift down? Explain in details. Hint: Does a typical US company use a general cash offer or a rights offering to issue new shares? (This question carries 12%)

Expert Solution

As there are many stocks with similar risk return characteristics in prevaling market, so the demand curve will be horizontal i.e. infinity. The curve represents the selling price of the stock in the market so the managers are more concerned about this issue because the slope of demand curve will affect the price at which they will sell the securities.

However, the investors interpret that when the firm announces new common stock its only when it is over-valued and the announcement will shift the demand curve downwards sloping and simultaneiusly the prices will decline.

Cash Offer makes the shares which are available to the general public via the means of IPO i.e. Initial Public Offering whereas, in the Rights Offering the shares will be offered to purchased at a discount to the current market price.

If firm's existing shareholders wanted to buy th shares, it would never sell them to public. Therefore, the U.S based company will use cash offers and it solely depends upon the circumstances.

Rahul Sunny answered 2 years ago

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