Question

Because of the adverse selection problem in the financial market, a firm’s newly issued stocks or...

Because of the adverse selection problem in the financial market, a firm’s newly issued stocks or bonds could be ( ) so that the firm would withdraw from the market. It will leave only the ( ) credit firms in the market.

Words:

Good, bad, undervalued, overvalued

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Adverse Selection problem occurs when there is information asymmetry in the market. One part has more information than other party. It occurs before the transaction takes place.

It is very difficult for the owners of the firm to distinguish between a firm with good prospects and a firm with bad prospects. In such case, the stocks of good firms are undervalued so that the owners of the firm can keep these stocks away from the market.

Such an action would leave only the bad credit firms in the market with higher risk of default.

Hence, Undervalued and Bad are the correct choices.

**if you liked the answer, then please upvote. Would be motivating for me. Thanks.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Because of the adverse selection problem in the financial market, a firm’s newly issued stocks or...
Because of the adverse selection problem in the financial market, a firm’s newly issued stocks or bonds could be ( ) so that the firm would withdraw from the market. It will leave only the ( ) credit firms in the market. Words: Good, bad, undervalued, overvalued
CASE: Atlantic Airlines Case Atlantic Airlines issued $100 million in bonds in 2008. Because of the...
CASE: Atlantic Airlines Case Atlantic Airlines issued $100 million in bonds in 2008. Because of the firm's low credit rating (B3), the bonds were considered junk bonds. At the time of the issue, the 20 year bonds were paying a yield of 12 percent. Investor Tom Phillips thought the yield on the bonds was particularly attractive and called his broker, roger Brown, to ask for more information on the debt issue. Tom currently held Treasury bonds paying four (4) percent...
1. Compared with a perfectively competitive market a monopoly is inefficient because                    a. it raises...
1. Compared with a perfectively competitive market a monopoly is inefficient because                    a. it raises the market price above marginal cost and produces a smaller output.             b. it produces a greater output but charges a lower price.             c. it produces the same quantity while charging a higher price.             d. all surplus goes to the producer.             e. it leads to a smaller producer surplus but greater consumer surplus. 2. The demand curve of a monopolist typically...
Costs of Capital vs Opportunity Costs 1.What connection do you think exists between costs of capital...
Costs of Capital vs Opportunity Costs 1.What connection do you think exists between costs of capital and "opportunity costs?" The cost of capital is measured so that you can evaluate the firm’s investment opportunities. In other words, it measures the risks associated with a project. Each project needs to be evaluated for different risk factors. Each of these projects pose a potential opportunity. And each opportunity has a cost that is attached to them. This is how there is a...
John and Marsha on Portfolio Selection The scene: John and Marsha hold hands in a cozy...
John and Marsha on Portfolio Selection The scene: John and Marsha hold hands in a cozy French restaurant in downtown Manhattan, several years before the mini-case in Chapter 9. Marsha is a futures-market trader. John manages a $125 million common-stock portfolio for a large pension fund. They have just ordered tournedos financiere for the main course and flan financiere for dessert. John reads the financial pages of The Wall Street Journal by candlelight. John: Wow! Potato futures hit their daily...
As the newly appointed financial analyst for Coverdale Office Machines Ltd., you have been asked to...
As the newly appointed financial analyst for Coverdale Office Machines Ltd., you have been asked to evaluate two alternative capital investment opportunities. The company’s corporate income tax rate is 24%. First, you must re-calculate the company’s cost of capital. The company recently paid its annual dividend of $2.75 per common share. According to your calculations, the company’s beta is 0.80. The company’s common shares currently trade for $25.80 each on the TSX. The market return is estimated at 16% and...
[1] The basic problem that gives rise to the study of economics is the need to:...
[1] The basic problem that gives rise to the study of economics is the need to: A) control the effects of actions by foreign governments. B) be sure all the goods and services produced in an economy get sold. C) use scarce resources to satisfy people's unlimited material wants and needs. D) control people's tastes and wishes so that the available resources can produce all the goods and services they want. [2] Economics is concerned with: A) earning as much...
Topic: Open Market Supply SHANGHAI -- Money markets are often described as the financial system's plumbing....
Topic: Open Market Supply SHANGHAI -- Money markets are often described as the financial system's plumbing. When they work, which is most of the time, hardly anyone notices, but when they get blocked up, it creates quite a stink. That is why China's money market -- in which banks and other financial institutions borrowed some $6.4 trillion from each other last month alone to fund their daily needs -- is becoming one of the world's most important markets to watch....
DONLEY BROTHERS The Donley Brothers Company had encountered the problem of latent defects in some of...
DONLEY BROTHERS The Donley Brothers Company had encountered the problem of latent defects in some of its purchased castings. Being latent, the defects did not show up until after machining had taken place at Donley Brothers. This group of failures greatly irritated the manufacturing boss, who declared that “repairing those darn castings is eating up all our profits.” When the defects were discovered, the rough casting had to be taken off the machine, the defect chipped out and repair-welded, and...
This is just a discussion post from my classmate. I just need to respond. Based off...
This is just a discussion post from my classmate. I just need to respond. Based off of what is written, please answer with a simple analysis of what's written. (example: Interesting post, I see that...) 1. Discuss each of the following business entity types including ownership, financial and legal and tax issues related to each type. Sole Proprietorship A sole proprietorship is owned by only one person and the firm and the owner are considered one and the same from...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT