Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Textbook Question
Chapter 17, Problem 2CQ
Stockholder Incentives Do you agree or disagree with the following statement? A firm’s stockholders will never want the firm to invest in projects with negative
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Students have asked these similar questions
Would a firm that has many good investment opportunities be likely to have ahigher or a lower dividend payout ratio than a firm with few good investment opportunities?Explain.
Which of the following statements regarding EVA is NOT CORRECT?
Group of answer choices:
EVA assumes that equity capital is not free.
A firm’s EVA will increase if it achieves the same operating income with less investor-supplied capital.
As long as a firm's ROIC is positive, its EVA will be positive.
If a firm reports positive net income, its EVA will also be positive.
Actions that increase reported net income may not always increase EVA.
Which of the following actions should a manager take to optimize the
firm's value? *
Changing the capital structure if and only if the firm's value rises.
Changing the capital structure if and only if the firm's value rises to the advantage of
inside management
Changing the capital structure if and only if the firm's value increases solely to the
benefit of debtholders.
Changing the capital structure if and only if the firm's value increases, even if it lowers
stockholders' value.
Changing the capital structure if and only if the firm's value grows and stockholder
equity remains stable.
Chapter 17 Solutions
Corporate Finance
Ch. 17 - Bankruptcy Costs What are the direct and indirect...Ch. 17 - Stockholder Incentives Do you agree or disagree...Ch. 17 - Capital Structure Decisions Due to large losses...Ch. 17 - Cost of Debt What steps can stockholders take to...Ch. 17 - MM and Bankruptcy Costs How does the existence of...Ch. 17 - Agency Costs of Equity What are the sources of...Ch. 17 - Observed Capital Structures Refer to the observed...Ch. 17 - Bankruptcy and Corporate Ethics As mentioned in...Ch. 17 - Bankruptcy and Corporate Ethics Finns sometimes...Ch. 17 - Prob. 10CQ
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- Evaluate the following:Managers should not focus on the current stock value because doing so will lead to an over emphasis on short term profits at the expense o long term profitsarrow_forward1.Why the limitation of portfilio analysis is it naively following the prescriptions of a portfolio model may actually reduce corporate profits if they are used inappropriately?arrow_forwardFountain Corporation's economists estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers of the company must choose between two mutually exclusive projects. Assume that the project the company chooses will be the firm's only activity and that the firm will close one year from today. The company is obligated to make a $5,400 payment to bondholders at the end of the year. The projects have the same systematic risk but different volatilities. Consider the following information pertaining to the two projects: Economy Probability .50 .50 Bad Good Low-Volatility Project Payoff $ 5,400 6,550 High-Volatility Project Payoff $ 4,800 7,150 a. What is the expected value of the company if the low-volatility project is undertaken? The high-volatility project? (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) b. What is the expected value of the company's equity if the…arrow_forward
- Which of the following is a criticism of a policy of maximizing the firm’s return on equity (ROE)? ROE is based on after-tax earnings, not cash flows. ROE does not consider risk. ROE ignores the size of the initial investment as well as future cash flows. All of these are criticisms of ROE as a goal.arrow_forwardWhat logical arguments might you use to convince your boss to forego the project despite its high rate of return? Is it possible that making investments with expected returns higher than your company’s cost of capital will destroy value? If so, how?arrow_forwardWhat does it mean to say that managers should maximize shareholders' wealth "subject to ethical constraints"? What ethical considerations might factor into decisions that result in lower cash flow and stock price effects than they might have otherwise been valued?arrow_forward
- If corporate managers are risk averse, does this mean that they will not take risks? If you were a corporate financial manager (NOT an individual person), would you prefer a low-risk, low-return project or a high-risk, high-return project, and why?arrow_forwardIf a firm could maximize either its current market price or its intrinsic value, whatwould stockholders (as a group) want managers to do? Explain.arrow_forwardSuppose profits earned by one firm are independent of profits earned by other firms. When managers and shareholders diversify, then O poor outcomes of some projects are worsened by favorable outcomes of other projects. O both managers and shareholders are considered risk loving. O both managers and shareholders are considered risk averse. O poor outcomes of some projects can be offset by favorable outcomes of other projects.arrow_forward
- 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 correctarrow_forwardChoose the correct. Which of the following is not included in the assumption on which Myron Gorden proposed a model on Stock valuation: A. Retained earning the only source of financing B. Finite Life of the firm C. Taxes do not exist D. Constant rate of return on firms investment.arrow_forwardSuppose a firm invest in proects that are much riskier than its average investments. Do you think the firm's weighted average cost of capital will be affected? Explain.arrow_forward
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