If You Know That Your Firm Is Facing Relatively Poor

question 38

Multiple Choice

If you know that your firm is facing relatively poor prospects but needs new capital,and you know that investors do not have this information,signaling theory would predict that you would

• A) Issue debt to maintain the returns of equity holders.
• B) Issue equity to share the burden of decreased equity returns between old and new shareholders.
• C) Be indifferent between issuing debt and equity.
• D) Postpone going into capital markets until your firm's prospects improve.
• E) Convey your inside information to investors using the media to eliminate the information asymmetry.

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Definitions:

Modest Dividend

A relatively small or conservative amount paid out to shareholders from a company's earnings.

Implied Constant Growth

A concept in financial modeling that assumes a company or economy will continue to grow at a consistent rate indefinitely, impacting valuation methods.

Kyocera

A multinational corporation based in Japan, specializing in ceramic and electronic products.

Last Dividend

The most recent distribution of profits made by a corporation to its shareholders.