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.
A
You might also like to view...
When auditors examine and test the call-back feature, they are testing which audit objective?
a. incompatible functions have been segregated b. application programs are protected from unauthorized access c. physical security measures are adequate to protect the organization from natural disaster d. illegal access to the system is prevented and detected
Which component of structure is described by “the organization which is divided into sections, departments, groups, teams, and/or sections?”
a. Specialization b. Formalization c. Standardization d. Departmentation
Bumpas Enterprises purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15, net 55. If the firm chooses to pay on time but does not take the discount, what is the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year.)
A. 24.49% B. 20.24% C. 19.03% D. 18.62% E. 17.00%
Ralph is the payee of a negotiable promissory note on which Brian is the maker. Ralph indorses the note in blank and delivers it to Clark, who then transfers it to David without indorsement. David presents it to Brian for payment when it becomes due,
but Brian claims he signed the note based upon fraud in the inducement and refuses to pay. a. Who is primarily liable on the instrument? Who is secondarily liable on the instrument? b. Who has warranty liability? Why? Explain. c. From whom can David try to collect?