ACCA Advanced Financial Management (AFM) Practice Exam

What do investors typically perceive when a company issues new stock?

1. It indicates growth potential

2. It is a signal that shares are overpriced

3. It implies financial difficulty

4. It shows confidence in market conditions

The correct answer is: It is a signal that shares are overpriced

Investors often perceive a company issuing new stock primarily as a signal that shares are overpriced. When a company decides to issue additional shares, it can suggest that management believes current stock prices are high relative to the company's intrinsic value. This perception can lead investors to question the sustainability of the share price, potentially resulting in stock price depreciation. Typically, if new shares are being issued at a time when the company is perceived to be doing well, investors may see it as an opportunity for growth. However, if the issuance occurs during a period of uncertainty or a downturn, it is often interpreted as a signal that the company may be struggling or needs immediate capital for operational purposes. This contrasts with the perception associated with the other options. When stock is issued, it is not always a clear signal of growth potential; such a perception could depend on market conditions and the company's financial health. Similarly, while some investors might see an issuing of stock as an indication of financial difficulties, it is not universally accepted as indicative of such since companies sometimes issue stock to expand or finance projects without being in trouble. Lastly, confidence in market conditions is not a universally held view, as investors typically evaluate the underlying reasons for the new stock issuance, which may not align with a broader confidence