QUESTION 15

1. All else equal, increasing leverage would (__) a firm's share price due to the expected bankruptcy costs and (__) are firm's share price due to the expected tax-shield.

A raise, lower

B lower, raise

C lower, lower

QUESTION 16

1. A positive NPV project requires a $20M investment. What market friction would lead a shareholder to prefer that the firm issue shares instead of debt to fund the project?

A. Bankruptcy Costs

B. Agency

C. Taxes

QUESTION 17

1. Due to ___ concerns, a dividend being lower than expected can send a negative signal to investors.

A. agency

B. bankruptcy costs

C. tax-related

QUESTION 18

1. An all-equity firm consists of a single project that will produce a perpetual cash flow of either $100M (good state) or $30M (bad state) next year. The probability of the good state is 30%. The beta of the asset cash flows is 1.25 and the risk-free rate is 3 percent and the market risk premium is 8 percent. There are 6M shares outstanding.

What is the price per share of this firm?

A. 83.33

B. 7.52

C. 65.38

5 points

QUESTION 19

1. An all-equity firm consists of a single project that will produce a perpetual cash flow of either $100M (good state) or $30M (bad state) next year. The probability of the good state is 30%. The beta of the asset cash flows is 1.25 and the risk-free rate is 3 percent and the market risk premium is 8 percent. There are 6M shares outstanding.

The manager claims that the cash flows are high. To prove it, they will issue a $25M dividend. Most of the shareholders are institutional investors. Would the public believe that the manager's signal is credible?

A. Yes

B. Not enough information

C. No