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:

Social Behaviour

Actions among individuals, shaped by social norms, cultures, and societal structures, that affect and are affected by others.

Motivated Group

A group of individuals with a high level of enthusiasm and willingness to achieve a common goal or task.

Assets

Resources or items of value owned by an individual or organization, which are expected to provide future economic benefits.