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

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