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

Question

Quizplus · Accepted Answer

If management believes the firm is undervalued, they would prefer to finance with debt to avoid issuing undervalued equity, which would dilute existing shareholders' value.

Management Has Just Discovered an Excellent Investment for Which It