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Questions and Answers
What does the Pecking Order Theory propose regarding capital structure?
What does the Pecking Order Theory propose regarding capital structure?
- Firms should always select the cheapest financing available. (correct)
- Firms should prioritize debt over equity financing.
- Firms should maximize their equity financing.
- Firms should aim for an optimal capital structure.
What causes adverse selection costs in firms?
What causes adverse selection costs in firms?
- Debt financing
- Information symmetry
- Optimal capital structure
- Information asymmetry (correct)
In the context of information asymmetry, what does 'one party to a transaction knowing more' refer to?
In the context of information asymmetry, what does 'one party to a transaction knowing more' refer to?
- Only the seller knowing more than the buyer (correct)
- Neither party having complete information
- Both parties having equal information
- The buyer knowing more than the seller
How can the seller take advantage of information asymmetry in a transaction?
How can the seller take advantage of information asymmetry in a transaction?
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What risk arises when a seller misrepresents the true quality of the item being sold?
What risk arises when a seller misrepresents the true quality of the item being sold?
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Which concept is closely related to adverse selection costs in transactions?
Which concept is closely related to adverse selection costs in transactions?
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How does information asymmetry impact pricing in transactions?
How does information asymmetry impact pricing in transactions?
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What is one way for buyers to counteract adverse selection due to information asymmetry?
What is one way for buyers to counteract adverse selection due to information asymmetry?
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'Pecking Order Theory' primarily focuses on:
'Pecking Order Theory' primarily focuses on:
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What is a key factor contributing to adverse selection costs according to the text?
What is a key factor contributing to adverse selection costs according to the text?
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