What might a company do if its stock price is perceived as inflated?

• A. Issue more debt
• B. Increase dividends
• C. Issue equity
• D. Buy back shares

Answer: (C)

When a company’s stock price is perceived as inflated, issuing equity is a strategic response. By issuing additional shares, the company can take advantage of the elevated stock price to raise capital. This is particularly effective if investors are willing to pay a premium for the stock, allowing the company to secure funds for projects, debt reduction, or other growth initiatives without taking on more financial risk.

Issuing equity can also help the company correct for perceived overvaluation by increasing the number of shares outstanding and diluting the price per share, which might help align the market value with underlying fundamentals. This approach can be especially appealing in situations where the company believes the stock cannot sustain its inflated price in the long term.

In contrast, other options like increasing dividends, issuing more debt, or buying back shares may not address the core issue of perceived overvaluation. Increasing dividends could signal that the company is confident about future cash flows but might not directly counteract inflationary perceptions. Issuing more debt can increase financial leverage and risk, and buying back shares typically indicates the company believes its shares are undervalued, which would contradict the perception of the stock being inflated.