Question 1

Assume that EGI decides to wait until after the release of the new video game before they raise the $100 million through the issuance of new shares.The number of new shares that EGI will issue is closest to:

Accepted Answer

The answer of Assume that EGI decides to wait until...

Question 2

The idea that managers who perceive the firm's equity is under-priced will have a preference to fund investment using retained earnings,or debt,rather than equity is known as the:

Accepted Answer

The pecking order hypothesis states that firms have a preference for internal financing sources (retained earnings) followed by debt and finally equity. This preference is based on the signaling theory of debt, which suggests that issuing debt sends a positive signal to the market while issuing equity sends a negative signal. Therefore, managers who believe the firm's equity is underpriced will be more likely to use debt or retained earnings to fund investment rather than issuing equity. The lemons principle and credibility principle are other theories related to the signaling effects of financing choices, but they do not specifically address the pecking order of financing sources.

Question 3

Which of the following is unlikely to influence a firm's choice of capital structure?

Accepted Answer

The answer of Which of the following is unlikely to...

Question 4

Assume that EGI decides to raise the $100 million through the issuance of new shares prior to the release of the new video game.EGI's share price following the release of the new video game will be closest to:

Accepted Answer

If EGI issues new shares to raise $100 million, then the total number of shares outstanding will increase. Assuming no change in the firm's value, the market price per share will decrease due to dilution. However, since management believes the true value of the firm is $20 per share, the new issuance will increase the overall value of the firm by $100 million / $20 per share = 5 million shares. Therefore, the total number of shares outstanding will be 20 million + 5 million = 25 million shares. The new share price will be:

New share price = Total value of the firm / Total number of shares outstanding
New share price = ($20 per share x 25 million shares) / 25 million shares
New share price = $20

Therefore, the share price following the release of the new video game will be $20 per share. However, this assumes that the new video game is successful and there are no other factors that affect the firm's value.

Question 5

If its managers increase the risk of the firm,then the expected market value of Luther's assets is closest to:

Accepted Answer

A)Expected value = .5(100)+ .2(300)+ .3(500)= $260 million

Question 6

Assume that EGI decides to raise the $100 million through the issuance of new shares prior to the release of the new video game.The number of new shares that EGI will issue is closest to:

Accepted Answer

Assuming the share price is $16, we can calculate the number of new shares EGI needs to issue by dividing the total amount needed ($100 million) by the share price ($16):
$100 million / $16 per share = 6.25 million new shares

Therefore, the closest answer choice is B) 6.25 million.

Question 7

Which of the following statements is FALSE?

Accepted Answer

This statement is false because too much debt can actually have the opposite effect and cause managers and equity holders to take fewer risks and under-invest in a firm due to the increased risk of default.

Question 8

Assume that EGI decides to wait until after the release of the new video game before they raise the $100 million through the issuance of new shares.EGI's share price following the release of the new video game will be closest to:

Accepted Answer

Waiting until after the release of the new video game may increase investor confidence and drive up demand for EGI's shares, leading to a higher share price. Since we don't have any other information or assumptions to make a more accurate estimate, we can assume a modest increase in share price and choose the closest option, which is $20.00 (Option B).

Question 9

The idea that claims in one's self-interest are credible only if they are supported by actions that would be too costly to take if the claims were untrue is known as the:

Accepted Answer

The answer of The idea that claims in one's self-interest...

Question 10

Which of the following influences a firm's choice of capital structure?

Accepted Answer

All of the options listed influence a firm's choice of capital structure. Taxes can affect a company's decision to use debt or equity financing, while agency costs and benefits of leveraging can determine the extent to which a company chooses to use debt financing. Signaling and adverse selection can influence a firm's ability to attract investors and the cost of capital. Therefore, firms consider all of these factors in determining their optimal capital structure.

Question 11

The idea that when a seller has private information about the value of good,buyers will discount the price they are willing to pay due to adverse selection is known as the:

Accepted Answer

The given scenario is describing a situation where buyers might interpret the private information of the seller about the quality of the good as an indication of the low value of the good. This concept is known as the 'lemons principle.' Therefore, option C is the correct answer. The pecking order hypothesis is related to the internal funding of the firm, signaling theory talks about how debt signals the borrower's quality, and the credibility principle is related to the assumption that people will behave rationally to maintain their credibility.

Quiz 16: Financial Distress,managerial Incentives,and Information