Question 1

Which of the following statements is FALSE?

Accepted Answer

A) The costs of selling assets below their value are greatest for firms with assets that lack competitive,liquid markets. 
B) Firms in financial distress tend to have difficulty collecting money that is owed to them. 
C) Suppliers may be unwilling to provide a firm with inventory if they fear they will not be paid. 
D) The loss of customers is likely to be large for producers of raw materials (such as sugar or aluminum),as the value of these goods,once delivered,depends on the seller's continued success. 
A) The costs of selling assets below their value are greatest for firms with assets that lack competitive,liquid markets. 
B) Firms in financial distress tend to have difficulty collecting money that is owed to them. 
C) Suppliers may be unwilling to provide a firm with inventory if they fear they will not be paid. 
D) The loss of customers is likely to be large for producers of raw materials (such as sugar or aluminum),as the value of these goods,once delivered,depends on the seller's continued success.

Question 2

Which of the following agency problems represents a form of moral hazard?

Accepted Answer

A) asset substitution 
B) debt overhang 
C) cashing out 
D) All of the above are examples of moral hazard. 
A) asset substitution 
B) debt overhang 
C) cashing out 
D) All of the above are examples of moral hazard.

Question 3

Which of the following statements is FALSE?

Accepted Answer

A) Creditors often place restrictions on the actions that the firm can take.Such restrictions are referred to as debt covenants. 
B) Covenants are often designed to prevent management from exploiting debt holders,so they may help to reduce agency costs. 
C) Agency costs are smallest for long-term debt. 
D) Covenants may limit the firm's ability to pay large dividends or the types of investments that the firm can make. 
A) Creditors often place restrictions on the actions that the firm can take.Such restrictions are referred to as debt covenants. 
B) Covenants are often designed to prevent management from exploiting debt holders,so they may help to reduce agency costs. 
C) Agency costs are smallest for long-term debt. 
D) Covenants may limit the firm's ability to pay large dividends or the types of investments that the firm can make.

Question 4

The total debt overhang associated with accepting project 4,is closest to:

Accepted Answer

A) $0 million 
B) $13.5 million 
C) $15.0 million 
D) $38.6 million 
A) $0 million 
B) $13.5 million 
C) $15.0 million 
D) $38.6 million

Question 5

Which of the following statements is FALSE?

Accepted Answer

A) When a firm faces financial distress,creditors can gain by making sufficiently risky investments,even if they have negative NPV. 
B) When a firm has leverage,a conflict of interest exists if investment decisions have different consequences for the value of equity and the value of debt. 
C) In some circumstances,managers may take actions that benefit shareholders but harm the firm's creditors and lower the total value of the firm. 
D) Agency costs are costs that arise when there are conflicts of interest between stakeholders. 
A) When a firm faces financial distress,creditors can gain by making sufficiently risky investments,even if they have negative NPV. 
B) When a firm has leverage,a conflict of interest exists if investment decisions have different consequences for the value of equity and the value of debt. 
C) In some circumstances,managers may take actions that benefit shareholders but harm the firm's creditors and lower the total value of the firm. 
D) Agency costs are costs that arise when there are conflicts of interest between stakeholders.

Question 6

Assume that capital markets are perfect except for the existence of corporate taxes.Your firm pays 40% of earnings in taxes and you decide to issue $25 million in new debt and $25 million in new equity.Your ownership stake in the firm following these new issues of debt and equity is closest to:

Accepted Answer

A) 58% 
B) 55% 
C) 33% 
D) 50% 
A) 58% 
B) 55% 
C) 33% 
D) 50%

Question 7

Taggart Transcontinental has a value of $500 million if it continues to operate,but has outstanding debt of $600 million.If Taggart declares bankruptcy,bankruptcy costs will equal $50 million,and the remaining $450 million will go to creditors.Instead of declaring bankruptcy,Taggart proposes to exchange the firm's debt for a fraction of its equity in a workout.The minimum fraction of the firm's equity that Taggart would need to offer to its creditors for the workout to be successful is closest to:

Accepted Answer

A) 50% 
B) 75% 
C) 83% 
D) 90% 
A) 50% 
B) 75% 
C) 83% 
D) 90%

Question 8

In order for Nielson Motor's to be willing to invest,project 5 must have an NPV greater than:

Accepted Answer

A) $10.0 million 
B) $12.5 million 
C) $18.0 million 
D) $22.5 million 
A) $10.0 million 
B) $12.5 million 
C) $18.0 million 
D) $22.5 million

Question 9

Assume that EGI decides to raise the $100 million through the issuance of new shares prior to the release of the new video game.EGI's share price following the release of the new video game will be closest to:

Accepted Answer

A) $18.00 
B) $19.00 
C) $20.00 
D) $16.00 
A) $18.00 
B) $19.00 
C) $20.00 
D) $16.00

Question 10

Assume that capital markets are perfect except for the existence of corporate taxes and that your firm pays 35% of earnings in taxes.If you want to maintain ownership of at least a 50%,then calculate the minimum amount of debt that you must issue to fund the expansion.

Accepted Answer

V^U = $75 million % Ownership = @#IMG-DLM& Given: V

Question 11

Use the information for the question(s)below.
Kinston Enterprises has no debt and a debt obligation of $47 million that is due now.The market value of Kinston's assets is $102 million,and the firm has no other liabilities.Assume that capital markets are perfect and that Kinston has 5 million shares outstanding.
-Kinston's current share price is closest to:

Accepted Answer

A) $20.40 
B) $9.40 
C) $11.00 
D) $10.00 
A) $20.40 
B) $9.40 
C) $11.00 
D) $10.00

Question 12

In an agency problem known as debt overhang,if the company has risky debt outstanding,equity holders will choose to invest only if:

Accepted Answer

A) the NPV of the project exceeds a cutoff equal to the relative riskiness of the firm's debt times its debt-equity ratio. 
B) the profitability index of the project exceeds a cutoff equal to the relative riskiness of the firm's debt times its debt-equity ratio. 
C) the NPV of the project is negative. 
D) the debt holders will lose all their money. 
A) the NPV of the project exceeds a cutoff equal to the relative riskiness of the firm's debt times its debt-equity ratio. 
B) the profitability index of the project exceeds a cutoff equal to the relative riskiness of the firm's debt times its debt-equity ratio. 
C) the NPV of the project is negative. 
D) the debt holders will lose all their money.

Question 13

Which of the following statements is FALSE?

Accepted Answer

A) A serious concern for large corporations is that managers may make large,unprofitable investments. 
B) While overspending on personal perks may be a problem for large firms,these costs are likely to be small relative to the overall value of the firm. 
C) Some financial economists explain a manager's willingness to engage in negative-NPV investments as empire building. 
D) While ownership is often diluted for small,young firms,ownership typically becomes concentrated over time as a firm grows. 
A) A serious concern for large corporations is that managers may make large,unprofitable investments. 
B) While overspending on personal perks may be a problem for large firms,these costs are likely to be small relative to the overall value of the firm. 
C) Some financial economists explain a manager's willingness to engage in negative-NPV investments as empire building. 
D) While ownership is often diluted for small,young firms,ownership typically becomes concentrated over time as a firm grows.

Question 14

Which of the following influences a firm's choice of capital structure?

Accepted Answer

A) Taxes 
B) Agency costs and benefits of leverage 
C) Signaling and adverse selection 
D) All of the above influence capital structure decisions. 
A) Taxes 
B) Agency costs and benefits of leverage 
C) Signaling and adverse selection 
D) All of the above influence capital structure decisions.

Question 15

Suppose that the managers at Rearden Metal will increase risk to maximize the expected payoff to equity holders.If Rearden has $230 million in debt due in one year,then the expected value of Rearden's assets are closest to:

Accepted Answer

A) $280 million 
B) $295 million 
C) $300 million 
D) $900 million 
A) $280 million 
B) $295 million 
C) $300 million 
D) $900 million

Question 16

Assuming your cost of capital is 6 percent,the present value of your expected wage if you accept Wyatt Oil's offer is closest to:

Accepted Answer

A) $138,000 
B) $140,000 
C) $144,000 
D) $150,000 
A) $138,000 
B) $140,000 
C) $144,000 
D) $150,000

Question 17

Which of the following projects should Nielson Motors accept?

Accepted Answer

A) 1 only 
B) 1,2,and 3 only 
C) 1 and 4 only 
D) 2,3,and 5 only 
A) 1 only 
B) 1,2,and 3 only 
C) 1 and 4 only 
D) 2,3,and 5 only

Question 18

Suppose that the managers at Rearden Metal will engage in empire building unless that behavior increases the likelihood of bankruptcy.If Rearden has $190 million in debt due in one year,then the expected value of Rearden's assets is closest to:

Accepted Answer

A) $265 million 
B) $280 million 
C) $295 million 
D) $300 million 
A) $265 million 
B) $280 million 
C) $295 million 
D) $300 million

Question 19

Suppose that BBB pays corporate taxes of 35% and that shareholders expects the change in debt to be permanent.Assume that capital markets are perfect except for the existence of corporate taxes and financial distress costs.If the price of BBB's stock rises to $10.85 per share following the announcement,then the present value of BBB's financial distress costs is closest to:

Accepted Answer

A) $21.25 million 
B) $35.00 million 
C) $11.40 million 
D) $13.75 million 
A) $21.25 million 
B) $35.00 million 
C) $11.40 million 
D) $13.75 million

Question 20

The idea that managers who perceive the firm's equity is under-priced will have a preference to fund investment using retained earnings,or debt,rather than equity is known as the:

Accepted Answer

A) signaling theory of debt. 
B) lemons principle. 
C) pecking order hypothesis. 
D) credibility principle. 
A) signaling theory of debt. 
B) lemons principle. 
C) pecking order hypothesis. 
D) credibility principle.

Exam 16: Financial Distress,managerial Incentives,and Information

Which of the following statements is FALSE?

Which of the following agency problems represents a form of moral hazard?

Which of the following statements is FALSE?

The total debt overhang associated with accepting project 4,is closest to:

Which of the following statements is FALSE?

Assume that capital markets are perfect except for the existence of corporate taxes.Your firm pays 40% of earnings in taxes and you decide to issue $25 million in new debt and $25 million in new equity.Your ownership stake in the firm following these new issues of debt and equity is closest to:

In order for Nielson Motor's to be willing to invest,project 5 must have an NPV greater than:

Assume that EGI decides to raise the $100 million through the issuance of new shares prior to the release of the new video game.EGI's share price following the release of the new video game will be closest to:

Assume that capital markets are perfect except for the existence of corporate taxes and that your firm pays 35% of earnings in taxes.If you want to maintain ownership of at least a 50%,then calculate the minimum amount of debt that you must issue to fund the expansion.

In an agency problem known as debt overhang,if the company has risky debt outstanding,equity holders will choose to invest only if:

Which of the following statements is FALSE?

Which of the following influences a firm's choice of capital structure?

Suppose that the managers at Rearden Metal will increase risk to maximize the expected payoff to equity holders.If Rearden has $230 million in debt due in one year,then the expected value of Rearden's assets are closest to:

Assuming your cost of capital is 6 percent,the present value of your expected wage if you accept Wyatt Oil's offer is closest to:

Which of the following projects should Nielson Motors accept?

Suppose that the managers at Rearden Metal will engage in empire building unless that behavior increases the likelihood of bankruptcy.If Rearden has $190 million in debt due in one year,then the expected value of Rearden's assets is closest to:

The idea that managers who perceive the firm's equity is under-priced will have a preference to fund investment using retained earnings,or debt,rather than equity is known as the:

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

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