Part 3

Question 1

Ideal Market

Answer 1

In an ideal market where demand and supply are equal, firms would have access to sufficient capital, leading to market clearing and enabling investment in all positive NPV projects.

Question 2

equilibrium disrupted

Answer 2

However, both theory and evidence show that such market equilibrium is often disrupted due to multiple reasons

Question 3

reasons for disruption

Answer 3

multiple reasons, including risk aversion by lenders, information asymmetry, and management’s preference to maintain certain financial ratios

Question 4

disscussed

Answer 4

These factors are critically discussed below.

Question 5

What are the 4 bullet points for part 3

Answer 5

Ideal market (sufficient capital, market clearing, all +NPV projects selected)

Equilibrium disrupted

Reasons for disruption

Overview