8. Which of the following does the trade-off theory predict? A. Bankruptcy costs mean having no debt is always optimal. B. Reducing leverage always reduces firm value. C. In the long run the firm's capital structure converges to the optimal one. D. None of the above.
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- Choose option a,b,c,d,e for the following: Question 6 - A higher financial risk: a. Arises when the debt – equity ratio is reduced. b. Can avert financial distress. c. Will cause the shareholders to expect lesser return. d. Indicates an inefficient use of fixed cost assets. e. Indicates an inefficient use of fixed cost funds.Profitable projects are difficult to find. a. Efficient capital markets b. The curse of competitive markets c. Risk-return trade-off d. All risks are not equal(Figure in attachment!!!) Problem 4: For each of the following statements, judge if it is true or false, andprovide a detailed explanation behind your answers.a) Roll’s critique is that the market is never truly in equilibrium and henceone can never truly test whether the CAPM holds.b) The figure below shows the risk and expected return of 4 given assets.Consider an investor with “Mean-Variance” preferences, and the statement:“If the investor is indifferent between assets A and D, then she prefers Cto B; but if she is indifferent between B and C, she prefers A to D.”.c) Suppose you make a “scatter plot”, each point representing a pair ofcontemporaneous returns from a time series of returns on the marketportfolio and a single asset. If the CAPM holds, you would expect all points to line up perfectly on a straight line, the slope of which is theasset’s beta.PS: (Problem 4 figure in attachment!!!)
- In financial markets, if there is an untapped profit opportunity, arbitrageurs will realize it and it will disappear. What does the EMH hypothesis say about the consequences of these arbitrageurs on prices?The project is accepted اخترأحد الخيارات a. If the profitability index is zero b. if the profitability index is less than one c. If the profitability index is greater than hundred d. If the profitability index is negative e. None of the option What is the limitation of Traditional approach of Financial Management? اخترأحد الخيارات a. All of the option b. More emphasis on long term problems c. Ignores allocation of resources d. One-sided approachWhen a firm has less current assets to pay off its current liabilities, it has ______ liquidity risk. Such a firm is likely to have _____ returns. Question 32 options: 1) lower, higher 2) lower, lower 3) higher, higher 4) higher, lower
- 8. Which of the following statements is FALSE? When a firm faces financial distress, it may choose not to finance new, positive-NPV projects. An under-investment problem occurs when shareholders choose to not invest in a positive-NPV project. Agency costs represent another cost of increasing the firm's leverage that will affect the firm's optimal capital structure choice. The agency costs of debt can arise only if there is no chance the firm will default and impose losses on its debt holders."If the firm's ROE is too low, the firm's debt ratio must be too low." True or false? Select one: O a. True O b. False3.If the interest rate on debt is lower than ROA, then a firm will __________ by increasing the useof debt in the capital structure.a. increase the ROE b. not change the ROE c. decrease the ROEd. change the ROE in an indeterminable manner e. none of the above
- 7.For a lending investment project, which of the following is a bad decision rule? If IRR is less than cost of capital: reject If IRR is greater than cost of capital: accept If profitability index is less than O: accept If profitability index is greater than O:acceptAccording to the Capital Asset Pricing Model (CAPM), an asset with negative beta: a. Cannot exist b. Is expected to earn a negative return c. Should be short sold d. Will not be included in the market portfolio e. None of the above5.(True or False) Risk shifting refers to a situation in which management of a firm with risky debt cannot fund a positive NPV project with equity because equityholders understand that some of the returns of the positive NPV project go to debtholders