Which of the Following Questions Is False

question 10

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:

Apparent Authority

A situation in which a person appears to have the authorization to act on behalf of another entity, leading third parties to reasonably believe such authority exists.

Knowingly

Acting with awareness or deliberate intention, often referenced in legal contexts to imply a person had knowledge or should have had knowledge of the implications of their actions.

Ratification

The act of formally confirming or approving an agreement, often after the agreement is initially made, to make it officially valid.

Fiduciary Duty

An obligation to act in the best interest of another party, such as that of a trustee towards a beneficiary.