What is the key requirement for a firm to have the ability to generate positive NPV in its projects?

2.    Why might leasing be advantageous?

3.    In financial distress firms may make sub-optimal investment decisions. Explain the rationale behind this statement.

4.    What are the direct and indirect costs of bankruptcy? Give examples of firms with high and low bankruptcy costs and explain. 

5.    "Stockholders need not be concerned with bankruptcy costs, since they will be borne by bondholders." Comment. (Assume that the firm declares bankruptcy when the value of assets is less than the value of obligations to bondholders. Thus, in bankruptcy, equity has zero value.)

6.     "Stock prices fall when firms issue new shares because of dilution of existing shareholders' position." Comment.

7.    "A firm should not pay dividend if it can reinvest the money in new projects at a profitable rate. Otherwise, shareholders will lose the value of the foregone projects." Comment.

8.    "Stockholders prefer a safe dividend rather than a risky capital gain." Comment.

9.    "Stock prices react positively to dividend increases. This shows that investors prefer more dividends." Comment.

10. Should firms hedge risk? Why?

Answer rating: 100% (QA)

1 The key requirement for a firm to have the ability to generate positive Net Present Value NPV in its projects is that the present value of the projects expected cash inflows exceeds the present valu... View the full answer