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

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Definitions:

Cash Flow

Refers to the total amount of money being transferred into and out of a business, especially as affecting liquidity.

Applicant's Character

The assessment of an individual's moral and ethical qualities, often evaluated during the hiring or loan application processes.

Lender

An individual, institution, or entity that provides funds to another with the expectation that the funds will be repaid, typically with interest.

Five C's

A set of critical criteria used in credit analysis, typically referring to character, capacity, capital, collateral, and conditions.