Agency Costs of Equity
8 Questions
0 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What does the Pecking Order Theory suggest regarding firms' capital structure?

  • Firms should aim for an optimal capital structure.
  • Firms should rely on debt financing only.
  • Firms should always select the financing option with the lowest cost. (correct)
  • Firms should prioritize equity financing regardless of cost.

    • What are adverse selection costs primarily caused by in the context of financing?

  • Growth opportunities
  • Inflation rates
  • Information asymmetry (correct)
  • High interest rates

    • What does information asymmetry refer to in the context of the Pecking Order Theory?

  • Perfect knowledge of all parties involved
  • No access to relevant information by any party
  • An equal distribution of information among all stakeholders
  • A situation where only the seller has more information than the buyer (correct)

    • How can a seller potentially take advantage in a situation of information asymmetry?

    <p>By deceiving buyers about the quality of goods</p> Signup and view all the answers

    What could be a consequence if a seller is willing to accept a low price for high-quality items?

    <p>The seller may face adverse selection issues</p> Signup and view all the answers

    In the context of financing, what might happen if a firm aims for an optimal capital structure ignoring costs?

    <p>The firm might face financial distress</p> Signup and view all the answers

    How can adverse selection impact firms' financing decisions according to the Pecking Order Theory?

    <p>By encouraging firms to prioritize equity over debt financing</p> Signup and view all the answers

    What is one potential consequence of information asymmetry in a market transaction?

    <p>Decreased market efficiency</p> Signup and view all the answers

    More Like This

    Agency Costs and Their Impact on Companies
    10 questions

    Agency Costs and Their Impact on Companies

    GreatestMalachite avatar
    GreatestMalachite
    Agency Costs of Equity
    10 questions

    Agency Costs of Equity

    RapidTechnetium avatar
    RapidTechnetium
    Moral Hazard and Accounting in Corporate Governance
    40 questions

    Moral Hazard and Accounting in Corporate Governance

    InexpensiveAntigorite596 avatar
    InexpensiveAntigorite596
    Agency Costs in Management
    37 questions

    Agency Costs in Management

    HappierZeugma avatar
    HappierZeugma
    Use Quizgecko on...
    Browser
    Open
    Browser
    Browser