Which of the Following Questions Is FALSE

question 79

Multiple Choice

Which of the following questions is FALSE?

• A)Sometimes management may believe that the securities they are issuing are priced at less than (or more than)their true value.If so,the NPV of the transaction,which is the difference between the actual money raised and the true value of the securities sold,should not be included in the value of the project.
• B)An alternative method of incorporating financial distress and agency costs is to first value the project ignoring these costs,and then value the incremental cash flows associated with financial distress and agency problems separately.
• C)When the debt level-and,therefore,the probability of financial distress-is high,the expected free cash flow will be reduced by the expected costs associated with financial distress and agency problems.
• D)If the financing of the project involves an equity issue,and if management believes that the equity will sell at a price that is less than its true value,this mispricing is a cost of the project for the existing shareholders.

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Definitions:

Collateral

Assets or property pledged by a borrower to secure a loan or other credit, and subject to seizure on default.

Tender Offer

A proposal by an entity to purchase shares from shareholders of another company, usually at a premium to the market price.

Target's Shares

Equity stakes in the Target Corporation, a publicly traded company known for its retail operations.

Price

Exchange value of a good or service.