According to the Signaling Theory That Has Been Proposed to Explain

question 63

Multiple Choice

According to the signaling theory that has been proposed to explain differences in firms' capital structures, which of the following actions by the management is taken as a signal that a firm's future prospects are not bright (i.e., not good) ? (Assume that the firm has multiple financing alternatives.)

• A)A small company raises new capital by issuing of new shares of common stock.
• B)A mature company raises new capital by issuing of new shares of common stock.
• C)A small company maintains a reserve borrowing capacity that can be used if good investments are discovered in the future.
• D)A mature company maintains a reserve borrowing capacity that can be used if good investments are discovered in the future.
• E)A mature company raises new capital by issuing debt beyond the amount that is indicated by its normal target capital structure.

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Definitions:

Initial Experimentation

The preliminary phase of trying or testing new ideas, processes, or products to assess their feasibility or effectiveness.

Idea Creation

is the process of generating new, innovative concepts or solutions within a business or creative context.

Environmental Hazards

Potential sources of danger to the environment and human health, including pollutants, chemicals, and natural events that pose risks.

Product Innovation

The creation of new products or significant improvements to existing products, often to meet new needs or market demands.