Question
Which of the following statements is false? Select the correct answer from the options listed below The market will normally ensure the actual and theoretical price of rights are quite close Businesses can sell the rights on behalf of those investors who are unwilling to exercise their rights or let them lapse It is important for directors to consider the amount of money to be raised before a rights issue of shares The market is neutral whether actual and theoretical price of rights are close or not
Answer
4
(202 Votes)
Uriah
Veteran · Tutor for 11 years
Answer
# Explanation## As an economics teacher, let's evaluate each statement in the problem compared to standard economic knowledge. ## Statement 1: The market will normally ensure the actual and theoretical price of rights are quite close. This is true because in an efficient market, actual prices tend to closely mirror theoretical prices since any substantial deviations could result in arbitrage opportunities.## Statement 2: Businesses can sell the rights on behalf of those investors who are unwilling to exercise their rights or let them lapse. This is true as businesses can indeed arrange to sell the rights of shareholders who decide not to exercise their rights. Usually, the proceeds are then remitted to the original rights owner. This is because the rights have monetary value which can be realized through a sale in the open market.## Statement 3: It is important for directors to consider the amount of money to be raised before a rights issue of shares. Yes, this is absolutely true. Directors need to account for many factors such as their financial goals, future expected profitability, the current state of the market, and potential dilution for current shareholders when considering a rights issue.## Statement 4: The market is neutral whether actual and theoretical price of rights are close or not. This statement is false. An efficient market watches for deviation between theoretical and actual prices. Market participants will endeavor to take advantage of such situations. If the MD of a company thinks that the company is healthy and growth-focused, either the theoretical or real price will have to adjust to bring these prices close together to prevent arbitrage.# AnswerThe following statement is false: "The market is neutral whether actual and theoretical price of rights are close or not."