1.Default costs can be divided into two categories: the direct costs, and the indirect costs. It is only the direct default costs that are directly reflected in a firm's valuation.

True

False

2.If all other factors are held constant, compared with more diversified firms, less diversified firms face:

A.Higher default probability

B.Higher expected default costs

C.Higher salaries demanded by employees

D.Less lenient credit terms offered by suppliers.

E.All of the above

3.Firm A is valued at $80 million. It is evaluated that its default costs are $18 million. Without hedging, the firm's default probability is 15%. What is the expected cost of default (in $million)?

A.$2.25 million

B.$2.50 million

C.$2.70 million

D.$3.00 million

E.None of the above

4.(continued from the above question). If an efficient hedging strategy reduces the default probability to 0, what is the benefits of the hedging relative to firm value (in %)?

A.2.250%

B.2.500%

C.3.000%

D.3.375%

E.None of the above