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Which of the actions would recommend allyson take

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Reference no: EM132966316

Problem 1: Allyson, who is the CFO of Mundane Minerals & Mining (MMM), is trying to decide whether to issue debt or common stock to finance the capital budgeting projects she has evaluated as acceptable (that is, the projects have positive net present values, NPV). Because MMM is a relatively small company, Allyson believes that the type of capital she uses to finance the projects will send a signal to investors. As a result, which of the following actions would you recommend Allyson take?

A. Issue equity, because investing in positive NPV projects is not in the best interests of the firm, and the existing stockholders will want to share such "bad news" with new stockholders.

B. Issue equity so as to dilute ownership and share the increase in wealth that results from investing in positive NPV projects with new stockholders.

C. Issue debt, because debt is riskier than common stock, thus the value of existing stockholders' stock will increase more than if new equity is issued.

D. Issue debt, because investing in positive NPV projects increases the value of the firm, and the existing stockholders probably prefer not to share such good fortune with new stockholders.

E. Investors do not care which source of funds the firm uses as long as the funds are invested in positive NPV projects; therefore, it shouldn't matter which type of capital is used.

Reference no: EM132966316

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