1. Private sources of financing include capital markets

True or False

2.Venture Capitalists provide equity financing to start-up companies. They are usually not involved in the business of the firm and leave the management of the companies they invest in free reins in conducting their business.

True or False

3.An IPO is an easy process that requires little paper work in the US

True or False

4. IPOs have historically exhibited an average underpricing of around 20% on average.

true or false

5.Underpricing of IPOs may be a necessary evil (to companies that list their shares on public equity markets) to incentivize large institutional investors to buy these stocks at the time of the IPO and reveal truthful information about their valuation of the listed companies.

true or false

6.When firms announce an SEO (Seasoned Equity Offering), their stock prices drop by 3% on average because investors understand that managers of the firms possess inside information about the firm's operation. Investors believe firms would not issue new equity if their managers did not believe their stock was not currently overvalued.

true or false

7.Debt holders receive cash flows only after shareholders have been paid their share.

true or false

8.In perfect capital markets, the value of unlevered companies (companies with no debt) is equal to the value of levered companies (companies with debt). Therefore there is no optimal capital structure that will make a firm more valuable.

true or false

9.A firm that changes its capital structure from no debt to some debt and equity is assumed to use the proceeds from the debt issuance to repurchase shares of equity from its existing shareholders.

true or false

10.The value of a firm with debt is higher than the value of the same firm without debt because interest payments are deductible from taxes.

true or false

11.Shareholders are the one who appropriate the increase in firm firm value due to the decrease in tax payments.

true or false

12.When there are corporate taxes, but no bankruptcy costs, the WACC decreases as a function of leverage and is at its lowest point when debt is 100% of the capital structure

true or false

13.There are direct costs for firms that are in a situation of financial distress. Some of these direct costs are related to the fact that customers and suppliers are reluctant to conduct business with a firm in financial distress.

true or false

14.Firms can deal with financial distress by selling major assets. This would be considered part of a financial restructuring.

true or false

15.Firms can deal with financial distress by renegotiating with banks and creditors. This would be part of their financial restructuring.

true or false

16.Chapter 7 regulates the priority of the distribution of the proceeds from the liquidation of the assets of a firm if all other recourses have been exhausted. Common stockholders' claims have the lowest priority.

true or false

17.The debtholders are the ones that bear all of the direct costs of bankruptcy

true or false

18.The static trade-off theory of capital structure argues that an optimal capital structure will trade off the benefits of using debt, in the form of lower taxes, against the costs of using debt, in the form of distress and bankruptcy costs.

true or false

19.Shareholders of a firm in financial distress have incentives to take too much risk. This risk is bad for debtholders but good for shareholders who want the CEO to gamble for resurrection.

true or false

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