1) The principal-agent problem would not occur if ________ of a firm had complete information about actions of the _____.

A) Owners; customers

B) Owners; managers

C) Managers; customers

D) Managers; owners

2) Because information is scarce

A) Helps explain why equity contracts are used so much more frequently to raise capital than are debt contracts.

B) Monitoring managers gives rise to costly state verification.

C) Government regulations, such as standard accounting principles, have no impact on problems such as moral hazard.

D) Developing nations do not rely heavily on banks for business financing.

3) A venture capital firm protects its equity investment from moral hazard through which of the following means?

A) It places people on the board of directors to better monitor the borrowing firm's activities.

B) It writes contracts that prohibit the sale of an equity investment to the venture capital firm.

C) It prohibits the borrowing firm from replacing its management.

D) It requires a 50% stake in the company.

4) Equity contracts account for a small fraction of external funds raised by American businesses because

A) There is no moral hazard problem when using a debt contract.

B) Of the reduced scope for moral hazard problems under equity contracts, as compared to debt contracts.

C) Equity contracts do not permit borrowing firms to raise additional funds by issuing debt.

D) Costly state verification makes the equity contract less desirable than the debt contract.

5) High net worth helps to diminish the problem of moral hazard problem by

A) Requiring the state to verify the debt contract.

B) Making the debt contract incentive compatible.

C) Collateralizing the debt contract.

D) Giving the debt contract characteristics of equity contracts.

Answer rating: 100% (QA)

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