7. When faced with financial distress, managers of firms acting on behalf of their shareholders' interests will tend to: I) Favour high-risk, high-return projects even if they have negative NPV; II) Refuse to invest in low-risk, low-return projects with positive NPVs; III) Delay the onset of bankruptcy as long as they can II only I, II, and III III only I only

7. When faced with financial distress, managers of firms acting on behalf of their shareholders' interests will tend to: I) Favour high-risk, high-return projects even if they have negative NPV; II) Refuse to invest in low-risk, low-return projects with positive NPVs; III) Delay the onset of bankruptcy as long as they can II only I, II, and III III only I only

Business/Professional Ethics Directors/Executives/Acct

8th Edition

ISBN:9781337485913

Author:BROOKS

Publisher:BROOKS

Chapter8: Subprime Lending Fiasco-ethics Issues

Section: Chapter Questions

Problem 9Q

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8. Which of the following statements is FALSE? When a firm faces financial distress, it may choose not to finance new, positive-NPV projects. An under-investment problem occurs when shareholders choose to not invest in a positive-NPV project. Agency costs represent another cost of increasing the firm's leverage that will affect the firm's optimal capital structure choice. The agency costs of debt can arise only if there is no chance the firm will default and impose losses on its debt holders.
46. Which of the following situations are likely to reduce agency conflicts between stockholders and managers? Group of answer choices a. Paying managers large fixed salaries. b. Enacting laws that increase the likelihood of corporate takeovers. c. Placing restrictive covenants in debt agreements like avoiding risky projects. d. All of the statements are correct. e. Two of the statements are correct.
Which of the following statements is false? Group of answer choices a.If management does not consider the needs of the bondholders of a firm, they could end up destroying shareholder value b.If management chooses to ignore the needs of bondholders when structuring a firm, the firm can be expected to have to pay a higher interest rate on its debt c.In a perfect capital market, if a firmʹs current capital structure is not optimal, one can expect that firm to be a takeover target d.Management should focus only on the needs of a firmʹs shareholders since they are the true owners of the firm and, as such, they elect the firmʹs directors
Under Modigliani and Miller's assumption of perfect capital markets, which of the following is NOT CORRECT? A) The proper WACC equation under perfect capital markets is the "pre-tax" WACC B) Taxes are irrelevant C) Reducing the debt ratio can cause the cost of debt and the cost of equity to decline, even as the WACC stays the same. D) The WACC does not change as the weights of debt and equity change E) Bankruptcy costs reduce the amount bondholders receive when bankruptcy occurs
Management, the board of directors and creditors are working to avoid a bankruptcy situation for a firm. If they believe the firm's problems are temporary, which of the following should they consider before entering into any short-term restructuring arrangement? Whether existing management or a special trustee should be in charge during the restructuring Whether the value to shareholders could be increased by selling the firm in pieces Whether the long-term value of the firm will be impacted Whether a formal or informal filing will be required
When a highly levered firm is close to bankruptcy, stockholders typically bear the full cost of investing in new positive NPV projects, but share some benefits with debtholders. Question options: a) True b) False
5. Which of the following statements is FALSE? a. In the extreme case, the debt holders take legal ownership of the firm's assets through a process called bankruptcy. b. Equity holders expect to receive dividends and the firm is legally obligated to pay them. c. A firm that fails to make the required interest or principal payments on the debt is in default. d. After a firm defaults, debt holders are given certain rights to the assets of the firm.
Which of the following statements is FALSE? As debt increases, the risk associated with bankruptcy and agency costs is reduced. Debt is often the least costly form of financing for a firm. Firms should probably use some debt in their capital structure. Different firms are subject to different levels of risk.
What are some situations other than immediate financial distressthat lead firms to file for bankruptcy?
9. Which of the following statements is CORRECT? a. A firm's business risk is determined solely by the financial characteristics of its industry. b. The factors that affect a firm's business risk include industry characteristics and economic conditions, both of which are generally beyond the firm's control. c. One of the benefits to a firm of being at or near its target capital structure is that this generally minimizes the risk of bankruptcy. d. A firm's financial risk can be minimized by diversification. e. The amount of debt in its capital structure determines a company's EBIT and business risk. f. All of the above answers are correct. g. None of the above answers is correct.
Which of the following statements is most correct? Why?* choices: a. The expected return on corporate bonds will generally exceed the yield to maturity. b. Firms that are in financial distress are forced to declare bankruptcy. c. All else equal, senior debt will generally have a lower yield to maturity than subordinated debt. d. Statements a and c are correct. e. None of the statements above is correct.
What affect would an increase in the cost of bankruptcy have on the capital structure of a firm? Question 10 options: Bankruptcy costs have no impact on the capital structure of firms Business risk will increase, so firms will use more debt and less equity Debt will become less expensive, so firms will use more debt and less equity Debt will become more expensive, so firms will use less debt and more equity