medium · Principles of Finance
Following a large share issuance, a company's Net Income remains the same as the previous year.
What is the most likely impact on the firm's Return on Equity (ROE)?
- The ROE will increase because the firm's interest expense will decrease as it uses the proceeds to pay down debt.
- The ROE will decrease because the equity base (the denominator) has increased while Net Income remains flat.
- The ROE will increase because the firm has more capital to deploy for future projects.
- The ROE will remain constant because share issuance is a financing decision, not an operating one.
Sign up free to see the explanation and track your rank →
More Principles of Finance practice
- Which loan has the higher effective annual rate (EAR)?
- Using the Capital Asset Pricing Model (CAPM), calculate the cost of equity for a firm with
- What is its current market price?
- What is the Multiple of Invested Capital (MOIC) for the equity investors?
- What is its Modified Duration?
- What is the Cash Flow from Operations (CFO)?
- What is the net profit per share for the investor?
- What is its Degree of Financial Leverage (DFL)?