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:

Hybrid Vehicle

A vehicle that uses more than one form of onboard energy to achieve propulsion, typically combining an internal combustion engine with an electric motor.

Battery Starter

A device that uses electrical power from a battery to start the engine, typically by turning the engine's crankshaft to initiate combustion.

Cool-Off Period

A legally mandated period allowing buyers to cancel a contractual agreement without penalty, typically seen in financial or real estate transactions.

Engine Speed

The measure of the number of revolutions per minute (RPM) at which an engine's crankshaft is rotating.