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:

Cash Sales

Transactions in which payment is made in cash at the time of sale, rather than on credit.

MasterCard

A global financial services corporation that processes payments between banks of merchants and the card issuing banks for purchases made with credit and debit cards.

VISA

A global payment technology company that facilitates electronic funds transfers throughout the world, most commonly through Visa-branded credit cards and debit cards.

Multiple-Step Income Statement

A form of income statement that contains several sections, subsections, and subtotals.