A Publicly Traded Firm Just Announced That Its Issuing Debt

question 63

Multiple Choice

A publicly traded firm just announced that its issuing debt to finance a new project.Which of the following scenarios is most likely true in a market with asymmetric information?

• A)The firm's future prospects look good and they are sending a costly signal that indicates they will be able to meet higher debt obligations.
• B)The firm has a questionable project and are attempting to increase the attractiveness of the project by raising the WACC via an increase in the level of debt financing.
• C)The firm has a poor project but they know debt financing provides an effective tax shield.
• D)None of these signals are viable explanations.

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