Other things being constant, when a firm sells new shares of stock, the

Question

BlackTom AI · Accepted Answer

Issuing additional shares increases the supply of that stock in the market; with demand unchanged, this puts downward pressure on the stock’s price.

1) Relevant concepts:
- Basic supply-and-demand: price is determined where market demand equals market supply. 
- Ceteris paribus (other things constant): only supply changes, demand stays the same.
- Dilution effect: more shares outstanding can reduce earnings per share (EPS), weakening buyer willingness to pay per share, which reinforces price decline.

2) Step-by-step reasoning:
- Initially market equilibrium: supply S0 equals demand D at price P0.
- The firm issues new shares, so the available supply shifts right from S0 to S1 (more shares at every price).
- With demand unchanged, the new intersection of demand and supply occurs at a lower price P1 < P0 to clear the larger quantity supplied.
- The dilution effect (reduced EPS) can further reduce demand at previous prices, amplifying the price decline.

3) Simple numerical illustration (all steps shown):
- Assume a linear demand curve P = 20 − 0.1Q (price P in dollars, quantity Q in shares).
- Initial supply Q0 = 100 shares. Initial price: P0 = 20 − 0.1(100) = 20 − 10 = $10.
- Firm issues 20 new shares, new supply Q1 = 120. New price: P1 = 20 − 0.1(120) = 20 − 12 = $8.
- Price falls from $10 to $8, demonstrating the effect.

4) Why the correct answer is correct:
- The direct effect of selling new shares is an increase in supply. With demand held constant, the market-clearing mechanism forces the price down. Dilution of per-share claims (EPS) reinforces lower willingness to pay.

5) Why other possible answers are incorrect:
- “Supply decreases” contradicts the action of issuing new shares — issuing increases, not reduces, available shares.
- “Price increases” would only occur if demand rose more than supply; ceteris paribus that is not the case.
- “Price unchanged” is unlikely because a larger supply at the same demand cannot be absorbed at the old price without excess supply.

6) Conclusion:
The supply increases and the price decreases, which matches the provided correct answer: “supply of the stock increases and the price decreases.”

Other things being constant, when a firm sells new shares of stock, the单项选择题

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