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Which of the following would NOT explain why the company faces capital rationing?
A.Asymmetry of information
B.Poor credit rating
C.Strict government monetary policy
D.Large proportion of tangible assetsSolution:
The correct answer is D.Tangible assets provide good potential security for providers of debt finance.
I am confused between option A and D and I don’t understand what is asymmetry of information?
Kindly let me know. Thanks in advance!
Asymmetry of information refers to a situation where one party in a transaction has more or better information than the other party.
Asymmetry of information refers to a situation where one party, typically the managers of a company, has more or better information about the company’s prospects than the other party, such as investors or lenders.This can lead to mispricing of shares and difficulties in obtaining financing, as lenders may perceive the company as riskier due to the lack of transparency.
In contrast, a large proportion of tangible assets (option D) would not explain capital rationing because tangible assets can serve as collateral, making it easier for the company to secure financing. Therefore, option D is the correct answer to your question about what would NOT explain why the company faces capital rationing
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