Which of the Following Statements Is False

question 18

Multiple Choice

Which of the following statements 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:

Reliability

The ability of a test to yield nearly the same score when the same people are tested and then retested on the same test or an alternative form of the test.

Ego Defense

Psychological strategies employed by the ego to protect itself from anxiety and unacceptable thoughts and feelings.

Reaction Formation

A defense mechanism where an individual expresses feelings that are the opposite of their unconscious desires.

Phallic Stage

A stage in Freudian psychosexual development occurring roughly between the ages of three and six, where the libido is focused on the genital area.