Question 1

One shortcoming of the traditional capital budgeting paradigm is that:&#10;A)it does not recognize that projects must be evaluated on the basis of their NPVs.&#10;B)it does not recognize that the firm may face capital rationing.&#10;C)it does not deal with why capital rationing is necessary

Accepted Answer

it does not deal with why capital rationing is necessary

Question 2

One shortcoming of the traditional capital budgeting paradigm is that:&#10;A)it does not recognize that projects must be evaluated on the basis of their NPVs.&#10;B)it does not recognize that the firm may face capital rationing.&#10;C)it does not deal with why some firms have multiple activities

Accepted Answer

it does not deal with why some firms have multiple activities

Question 3

A ___is a seasoned equity offering (SEO) of a firm that has recently gone public.&#10;A)follow-on&#10;B)supplemental IPO&#10;C)lockup offering&#10;D)quasi-seasoned equity offering

Accepted Answer

A follow-on offering, also known as a follow-on public offer (FPO), is when a company, already public, issues additional shares after the initial public offering (IPO). This is a common way for companies to raise capital after going public.

Question 4

In a multi-divisional firm, what are the two fundamental (and related) problems with the internal capital allocation process?&#10;A)centralized information and tax-avoidance&#10;B)monitoring and signaling&#10;C)decentralized information and incentive problems&#10;D)signaling and tax-avoidance

Accepted Answer

The two fundamental problems with the internal capital allocation process in a multi-divisional firm are decentralized information and incentive problems. Decentralized information refers to the challenge of accurately assessing the value and potential of projects across different divisions due to information being spread out. Incentive problems arise when the interests of division managers do not align with those of the overall firm, leading to potential misallocation of resources.

Question 5

In undertaking a seasoned equity offering (SEO), why do firms almost always hire an underwriter via negotiation rather than competitive bidding?&#10;A)The SEC mandates negotiation for SEOs (except in rare cases).&#10;B)The selling process can be problematic because of informational asymmetry problems.&#10;C)Negotiation actually results in a lower underwriter spread.

Accepted Answer

Negotiation is preferred due to informational asymmetry problems between the firm and potential investors. An underwriter familiar with the firm can better manage these issues, making the selling process more efficient and potentially more successful.

Question 6

Which of the following is NOT a stated reason why an internal capital market, managed by a firm's headquarters, may be superior to external financing?&#10;A)External equity financing is problematic because of the information asymmetry problem.&#10;B)Even if internal and external providers of capital have the same ability to monitor, internal providers will choose to monitor more intensely because they have residual control over the assets, and therefore get more of the gains from monitoring.&#10;C)If one unit performs poorly, its assets can be redeployed efficiently.&#10;D)Management is generally better at managing internal (vs.external) equity.

Accepted Answer

The correct answer is D because it does not specifically address a reason why an internal capital market might be superior to external financing. Instead, it makes a general statement about management's ability without directly relating to the advantages of internal capital markets, such as information asymmetry, monitoring benefits, or asset redeployment efficiency mentioned in the other options.

Question 7

Which of the following is the explanation of why the market generally reacts negatively to the announcement of a SEO offered in the pecking order hypothesis?&#10;A)Management is taking a self-serving action.&#10;B)Management is signaling that the shares are overpriced.&#10;C)Creditors are forcing the firm to increase its equity base.&#10;D)The firm is revealing that it has not generated as much earnings as the market expected.

Accepted Answer

The pecking order hypothesis suggests that firms prefer internal financing and will issue equity only when they believe their stock is overvalued, thus signaling to the market that the shares might be overpriced.

Question 8

In the text's equity management model based on Myers (2000), a firm's net cash flow is allocated in three directions.Which of the following is NOT one of these directions?&#10;A)acquisitions&#10;B)dividends and share repurchases&#10;C)reinvestment&#10;D)management's private benefits of control (i.e., perks)

Accepted Answer

The answer of In the text's equity management model based...

Question 9

Myers (2000) recognizes three imperfect solutions to the basic contracting problem between diffuse shareholders and management.Which of the following is NOT one of these solutions?&#10;A)dividends&#10;B)monitoring&#10;C)incentive compensation&#10;D)contingent shareholder intervention

Accepted Answer

Myers (2000) identifies dividends, monitoring, and incentive compensation as imperfect solutions to the contracting problem between shareholders and management. Contingent shareholder intervention is not mentioned as one of these solutions.

Deck 13: Managing Internal Equity and Seasoned Equity Offerings