Question: 1. (True/False. Explain) The more free cash flow (FCF) a firm generates, the higher the agency problem is. 2. Gandalf is buying a new staff.

1. (True/False. Explain) The more free cash flow (FCF) a firm generates, the higher the agency problem is. 2. Gandalf is buying a new staff. The seller has given him the following payment options. Which one would you suggest him to take? (negative signs indicate cash outflow for Gandalf] Year 1 2 3 4 -1000 -1000 -2000 -4000 Option 1 Option 2 Option 3 - 2000 -2000 -2000 -2000 -4000 -2000 - 1000 -1000 Option 4 -6000 -2000 0 0 3 [True/False. Explain) A consumer will require compensation for deferring her/his consumption. 4. If you are facing a choice between a federal bond and a municipal offering same yields and risks, which one would you choose? Why? 5. Your grandfather is giving you an option to choose between two discount bonds. Both have the same coupon rate and required rate of retum. However, one pays coupon annually and the other pays coupon semiannually. Which one would you choose

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