Management should not solely focus on financial factors like the ones outlined in part (a) of this question. Qualitative characteristics should also be taken into account, because they also hold an important affect on the organisation. For instance, management should consider the willingness of common stockholders to a new issue of common stock. Normally a new issue of common stock leads towards a fall in the share price due to an increase in the supply of stock.
In addition the proportion of shareholders will increase and shareholders that hold a significant voting power may be reluctant for this to happen. The debt decision will also hold an affect on common stockholders. A growth strategy is frequently regarded as a risky scheme due to the considerable financial commitments that it encompasses. This is increasingly the case when debt finance is used. Additional risk imposed on common stockholders resulting from the debt decision may be highly uncomfortable especially if the return on the new investment is envisaged to be long-term.
This may negatively affect the organisation in the stock market and also adversely impact the stock price. One ought to bear in mind an important premise of finance, which encompasses the higher the risk the higher the expected return. Failure to abide with such premise may negatively affect the organisation. Reference: McKenzie W. (2003). Using and Interpreting Company Accounts. Third Edition. London: Prentice Hall.
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