A publicly traded firm just announced that its issuing debt to finance

A publicly traded firm just announced that its issuing debt to finance a new project. Which of the following scenarios is most likely TRUE in a market with asymmetric information?

A) The firm’s future prospects look good and they are sending a costly signal that indicates they will be able to meet higher debt obligations.
B) The firm has a questionable project and are attempting to increase the attractiveness of the project by raising the WACC via an increase in the level of debt financing.
C) The firm has a poor project but they know debt financing provides an effective tax shield.
D) None of these signals are viable explanations.

ANSWER

A