Question: ] Explain how the following problem (EXAMPLE 16.8) can be explained by adverse selection, more specifically lemon principle (EXAMPLE 16.8) Suppose that Beltran currently uses

] Explain how the following problem (EXAMPLE 16.8) can be explained by "adverse selection," more specifically "lemon principle

(EXAMPLE 16.8)

Suppose that Beltran currently uses all-equity financing, and that Beltran's market value in one year's time will be either $100 million or $50 million depending on the success of the new strategy. Currently, investors view the outcomes as equally likely, but Smith has information that success is virtually certain. Will leverage of $25 million make Smith's claims credible? How about leverage of $55 million?

Lemon principle - "When a seller has private information about the value of a good, buyers will discount the price they are willing to pay due to adverse selection."

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