You Are Evaluating a Company and Have Found a New

question 48

Multiple Choice

You are evaluating a company and have found a new way to calculate the present value of bankruptcy costs,agency costs of outside equity as well as debt.You find that the agency costs of outside equity is $100 while the agency cost of outside debt is $1,000,000.The costs of bankruptcy are also $1,000,000.What type of firm does most likely describe?

• A) a firm with too little leverage
• B) a firm with too much leverage
• C) a firm with too much equity
• D) a firm that should disregard its agency costs

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Definitions:

Currency Exchange Rates

The value of one currency for the purpose of conversion to another, which plays a crucial role in international trade and finance.

Global Marketplace

An interconnected market beyond national borders where goods, services, and currencies are exchanged worldwide.

Cultural Diversity

The existence of a variety of cultural or ethnic groups within a society, celebrating differences in heritage, language, traditions, and values.

Income Distribution

The way in which a country's total income is spread among its population, affecting economic equality and living standards.