Question

1."The announcement of a debt offering is generally taken as a signal that the firm's prospects as seen by its management are good; conversely, a stock offering is generally taken as a negative signal." True or false? Select one: a. False b. True

2."Due to information asymmetry, investors tend to believe that the management would issue common stock only if it is under-priced." True or false? Select one: a. False b. True

Answer 1

1: True

(Debt offering means that the company is considered creditworthly and shows high prospects. Stock offering is a sign that the firm has negative prospects and wants more owners to share the risks)

2: False

(Assymettrical information means that investors have lesser information than management. The management will issue stock when the markets assessment of value is higher than the management assessment of value which means that stock will be issued when it is overpriced.)