Question 4

Which of these statements are true?

1)The bird-in-hand hypothesis assumes myopic individuals who see future dividends to be risky.

2)The company has the incentive to issue overvalued stock as the implied cost of capital is low.

3)Equity issuance has the danger of driving down the equity price.

4)So long as the company does not perceive the risk of bankruptcy the incentive to borrow still exists because tax deductibility due to borrowing generates tax savings.

(a)1, 2, 3, 4

(b)1, 2, 4

(c)2, 4

(d)1, 3