Which of the following would not be a sensible explanation of why convertibles and warrants are issued if markets are efficient?
A)Cash flow from these securities best match cash flow of the firm.
B)If the firm does well, convertible bonds will turn out to have been the better alternative versus issuing common stock.
C)The securities are useful when it is costly to assess the risk of the issuing firm.
D)The securities may resolve agency problems associated with raising money.
E)All of the above are sensible explanations.

Question

Quizplus · Accepted Answer

The efficient market hypothesis suggests that all available information is already reflected in the current stock price, so the issuance of convertibles and warrants would not be motivated by the expectation that common stock will perform poorly. The other choices are all sensible explanations for why convertibles and warrants might be issued even if markets are efficient.

Which of the Following Would Not Be a Sensible Explanation