Management has just discovered an excellent investment for which it needs additional funding.Relative to the discussion on asymmetric information the firm should
A) finance with new common stock if management believes the firm is undervalued.
B) finance with preferred stock if the firm is at value.
C) finance with debt if management believes the firm is undervalued.
D) finance with debt if management believes the firm is overvalued.

Question

Quizplus · Accepted Answer

If management believes the firm is undervalued, issuing new common stock could signal to the market that the firm is overvalued, potentially leading to a decrease in stock price. Financing with debt avoids this negative signal and takes advantage of the undervaluation.

Management Has Just Discovered an Excellent Investment for Which It