If There Were No Adverse Selection Problems in the Stock

question 31

Multiple Choice

If there were no adverse selection problems in the stock market,

• A)some well-run firms would pay more to raise funds.
• B)some poorly-run firms would pay less to raise funds.
• C)the willingness of savers to invest in the market would be increased.
• D)the volume of new stock issues would be lower.

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Definitions:

Cost of Capital

The yield a firm needs to generate on its investments to preserve its market value and draw in capital.

Investors' Money

Funds provided by investors to be used in business activities with the expectation of future returns.

Financial Statements

Reports created from accounting records that summarize a firm’s performance in money terms.

Cost of Capital

Refers to the opportunity cost of making a specific investment, representing the rate of return that could have been earned by putting the same money into a different investment with equal risk.