According to the Signaling Theory, Why Will a Firm with Unfavorable

question 41

Multiple Choice

According to the signaling theory, why will a firm with unfavorable prospects want to sell stock?

• A) To share the losses with new investors
• B) To increase bankruptcy cost with more debt
• C) To skip the dividends payable on common stock
• D) To maintain a reserve borrowing capacity
• E) To have tax benefit/bankruptcy cost trade-off

---

Definitions:

Merchandise Inventory

Goods that a retail or wholesale company holds for the purpose of resale to customers.

Selling Expenses

Costs incurred directly by the sales activities of a business, including advertising, sales commissions, and promotional materials.

Administrative Expenses

Expenses that are not directly tied to a specific function such as manufacturing, production, or sales, but necessary for the overall day-to-day operations of a company.

Product Costs

Costs that are directly incurred in the production of goods or services, including direct materials, direct labor, and manufacturing overhead.