To Reduce Adverse Selection

question 34

Multiple Choice

To reduce adverse selection,

• A)firms can use screening.
• B)both consumers and firms can use screening.
• C)the government could eliminate all monopolies and oligopolies.
• D)Both B and C.

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Definitions:

DCF Approach

The Discounted Cash Flow (DCF) approach involves estimating the present value of an investment based on its expected future cash flows, adjusting for the cost of capital.

Cost of Equity

The rate of return a company is expected to pay to its shareholders to compensate them for the risk of investing in the company.

Retained Earnings

Profits that a company has chosen to reinvest in the business rather than distribute to shareholders as dividends, accumulated over time.

Hurdle Rate

The project cost of capital, or discount rate. It is both the rate used in discounting future cash flows in the net present value method and the rate that is compared to the internal rate of return.