Assume There Are Two Companies

question 40

Multiple Choice

Assume there are two companies. Both issue stock, but one is high quality and the other low quality. If potential investors cannot distinguish the quality of the company:

• A) the shares of the low quality firm will disappear from the market.
• B) the shares of both companies will trade on the market.
• C) the shares of the high quality firm will disappear from the market.
• D) this is an example of moral hazard and the shares of both companies will cease to trade.

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Definitions:

Human Resource

An organizational function that deals with recruitment, management, and direction of people who work in an organization.

Severe Fines

Substantial monetary penalties imposed on individuals or organizations as punishment for breaches of contracts, laws, or regulations.

Taxes

Mandatory financial charges imposed by governments on individuals or entities to fund public expenditures, with failure to pay typically resulting in legal penalties.

Canada Pension Plan

A mandatory public insurance program in Canada that provides income in retirement, as well as benefits to the disabled and survivors of deceased contributors.