Which of the Following Reasons Is NOT a Valid Explanation

question 74

Multiple Choice

Which of the following reasons is NOT a valid explanation of why managers sometimes choose to take on negative-NPV Projects?

• A) The NPV analysis does not include a valuable real option to expand the project if things go well.
• B) If the company has debt, managers may create value for shareholders by taking on some risky negative-NPV projects.
• C) Managers' pay-off functions represent the pay-offs of lenders. By taking negative-NPV projects, the managers can create value for lenders.
• D) All of the above descriptions are valid explanations for why managers sometimes take on negative NPV projects.

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Definitions:

Underpricing

The practice of setting the initial offering price of a security, typically shares, below its market value, which often leads to a first-day surge in its stock price.

IPO

Initial Public Offering, the process by which a private company becomes publicly traded by offering its shares for the first time to the public.

Seasoned Equity Offering

When a company with publicly traded shares issues additional shares. Also known as a “secondary” or “follow-on” offering.

Primary Market

The primary market is the financial market where new securities are issued and sold for the first time, directly from the issuer.