Question $1(10$ points$)$

Issuing equity is bad for existing shareholders because it dilutes earnings. New shareholders have claims to the firm's earnings, so existing shareholders are worse off. As a result, stock prices drop. Is this true or false?

False; if new equity is issued, the firm has access to fresh resources, which can be invested to increase earnings. So if earnings are increased and the number of shareholders is also increased, the net impact on earnings per share is ambiguous.

True; the new equity can be invested to increase earnings, but the firm will have to underprice the new shares in order to convince new shareholders to hold them. As a result, there will be earnings dilution and existing shareholders will be worse off.

True; new equity issuance is a book$-$keeping entry, the main result of which is an increase in the number of shares outstanding. This leads to a lower earnings per share and so existing shareholders are worse off.

True. The new equity can be invested to increase earnings, but the increase in the number of shares outstanding means that earnings per share has to drop.