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20. Which of the following are the most likely reasons for why a stock price might not react at all on the day that new information related to the stock issuer is released? I. Insiders knew the information prior to the announcement. II. Investors need time to digest the information prior to reacting. III. The information has no bearing on the value of the firm. IV. The information was anticipated. A. I and II B. I and III C. III and IV D. II and III 16. According to the pecking order theory, which of the following are correct? 1. For financing needs, firms prefer to first tap internal sources, such as retained earnings II. There is an inverse relationship between a firm's profit level and its debt level. III. Firms prefer to issue new equity rather than source external debt. IV. Firms should aim to reach a target debt-ratio in the long-run. A. II and IV B. I and III C. I and II D. I, II, and IV 17. According to the pecking order theory of capital structure, why do firms avoid issuing equity? A. Because equity issuance signals that managers believe their stock is overvalued, which causes the price of the stock to fall B. Because fees associated with issuing new equity are so high C. Because they want to avoid dilution of earnings per share D. Because they don't want to commit to paying dividends on the new equity 18. Which of the following statements is MOST correct? A. No matter if a firm pays dividend or not, the cost of common stock is normally bigger than cost of debt. B. Because the cost of debt is lower than the cost of equity, value-maximizing firms maintain debt ratios of close to 100%. C. Corporations that are 100% equity financed will have a much lower weighted average cost of capital because the lack of debt lowers their risk of bankruptcy. D. The cost of capital on any source of capital, is always equal to the required rate of return on that source