2. Which of the following is false about the under-investment problem? The under-investment problem is greatest for all-equity firms Under-investment leads to a reduction in firm value Equity holders in levered firms may not invest in some positive NPV projects due to the transfer of value to debt-holders Risk-shifting leads to a transfer of value from debt-holders to equity holders

2. Which of the following is false about the under-investment problem? The under-investment problem is greatest for all-equity firms Under-investment leads to a reduction in firm value Equity holders in levered firms may not invest in some positive NPV projects due to the transfer of value to debt-holders Risk-shifting leads to a transfer of value from debt-holders to equity holders

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Similar questions

Which statement below is incorrect? Select one: A. Compared to interview, survey is more suitable to ask standardised questions. B. If a firm has more intangible assets, according to the trade-off theory, it is more likely to have a higher leverage. C. If a firm is more profitable, according to the pecking order theory, it should use less debt for financing. D. The CAPM model implies that a stock with a higher beta has a higher return on average.
Q.A low debt ratio, compared to other industry competitors with similar operating leverage, most likely means the firm has A. a higher cost of capital than the competition. B. a higher EVA than the competition. C. a lower bond rating than the competition. D. none of the above.
Company PL and company NL are identical except PL has positive financial leverage whereas NL has negative financial leverage. Which of the following are true? You can select more than one. PL’s return on invested capital (ROIC) is more volatile than NL’s ROIC. PL’s return on equity (ROE) is more volatile than NL’s ROE. PL’s ROIC and NL’s ROIC are equally volatile. PL’s ROE and NL’s ROE are equally volatile. PL’s return on invested capital (ROIC) is less volatile than NL’s ROIC. PL’s return on equity (ROE) is less volatile than NL’s ROE
“Having zero debt in the firm’s capital structure is not an ideal scenario.” Do you agree withthis statement? Explain
Managers may sometimes be criticized for being overly conservative. If a firmdoes not borrow as much as it should, reach its optimal capital structure, andcomment on the market forces that might pressure management to use more debt.
"Homemade leverage is just a theoretical exposition, it doesn't tell you anything about the real relationship between capital structure and the value of the firm". Do you agree or disagree with this statement? Why?
What types of firms would we expect to observe higher direct agency costs of equity, such as consuming excessive perquisites by management ? Question 7 options: a) Firms with high free cash flows b) Firms with fewer growth opportunities c) Firms with weak governance structures d) All of the above options are correct e) None of the options are correct
Explain Limitations that have caused some companies to reduce their use of portfilio analysis. 1. Naively following the prescriptions of a portfolio model may actually reduce corporate profitsif they are used inappropriately.
Modigliani and Miller suggest that, under certain assumptions, financing decisions do not matter in that they do not affect the value of the firm. They define when these assumptions hold as perfect markets. Which of the following are assumptions that they claim must hold for financing decisions to be irrelevant? Group of answer choices There are no taxes There are no transaction costs The firm has a fixed investment policy The sun must rise in the North and set in the South

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