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    Asymmetric Information Theory of Capital Structure

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    Which of the following statements concerning the asymmetric information theory of capital structure is false?

    a. If outside funds are required, managers would issue new common stock if they believe their stock is overvalued.

    b. If outside funds are required, managers would issue debt when they believe their stock is undervalued.

    c. Investors recognize managers' incentives and hence tend to mark down a firm's stock price when new common stock is issued.

    d. Firms should maintain a reserve debt capacity, so that they can always issue debt under relatively favorable terms.

    e. Firms should overleverage, so that they can always issue new common stock under relatively favorable terms.

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