Exam 16: Financial Distress,managerial Incentives,and Information

Use the information for the question(s)below. JR Industries has a $20 million loan due at the end of the year and under its current business strategy its assets will have a market value of only $15 million when the loan comes due.JR is considering a new much riskier business strategy.While this new riskier strategy can be implemented using JR's existing assets without any additional investment,the new strategy has only a 40% probability of succeeding.If the new strategy is a success,the market value of JR's assets will be $30,but if the strategy fails the assets will be worth only $5 million. -What is the overall expected payoff under JR's new riskier business strategy?

Which of the following industries likely to have the highest costs of financial distress?

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

Suppose that MI has zero-coupon debt with a $125 million face value due next year.The initial value of MI's debt is closest to:

Which of the following statements is FALSE?

Use the information for the question(s)below. Wildcat Drilling is an oil and gas exploration company that is currently operating two active oil fields with a market value of $200 million each.Unfortunately,Wildcat Drilling has $500 million in debt coming due at the end of the year.A large oil company has offered Wildcat drilling a highly speculative,but potentially very valuable,oil and gas lease in exchange for one of their active oil fields.If Wildcat accepts the trade,there is a 10% chance that Wildcat will discover a major new oil field that would be worth $1.2 billion,a 15% that Wildcat will discover a productive oil field that would be worth $600 million,and a 75% chance that Wildcat will not discover oil at all. -What is the overall expected payoff to Wildcat from the speculative oil lease deal?

Which of the following statements is FALSE?

Assume that in the event of default,20% of the value of MI's assets will be lost in bankruptcy costs and suppose that MI has zero-coupon debt with a $125 million face value due next year.The yield to maturity of MI's debt is closest to:

Suppose that MI has zero-coupon debt with a $125 million face value due next year.The expected return of MI's debt is closest to:

Which of the following is one unintended consequence of the federal bailouts in response to the 2008 financial crisis?

Which of the following statements is FALSE?

Use the information for the question(s)below. Monsters Incorporated (MI)in ready to launch a new product.Depending upon the success of this product,MI will have a value of either $100 million,$150 million,or $191 million,with each outcome being equally likely.The cash flows are unrelated to the state of the economy (i.e.risk from the project is diversifiable)so that the project has a beta of 0 and a cost of capital equal to the risk-free rate,which is currently 5%.Assume that the capital markets are perfect. -Assuming that in the event of default,20% of the value of MI's assets will be lost in bankruptcy costs,the initial value of MI's equity without leverage is closest to:

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

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Rose Industries has a $20 million loan due at the end of the year and its assets will have a market value of only $15 million when the loan comes due.Currently Rose has $2 million in cash.Rose is considering two possible alternative uses for this cash.One possibility is to pay the $2 million out to shareholders in the form of a special dividend.The second possibility is to invest the $2 million into a project that offers a $4 million NPV.What are the payoffs to the debt and equity holders under each of the two alternatives? Which alternative would equity holders prefer? Which alternative would debt holders prefer? What is the economic term that describes this situation?

The number of new shares that Kinston must issue to raise the capital needed to pay its debt obligation is closest to:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?