Question

1)   When you go through an IPO you

1. raise capital from venture capitalists.
2. raise debt from a bank.
3. sell shares to the general public.
4. issue preferred stock.  

2)   In the Principal/Agent relationship the Agent has

1. the right to dismiss the Principal.
2. no fiduciary responsibility towards the Principal.
3. inferior skills.
4. superior knowledge.

3)   Which of the following is notan example of a Principal/Agent relationship?

1. Student/Professor.
2. Firm/Investment Bank.
3. Equity Holder/Management.
4. Management/Debt Holder.

4)  The amount of debt that a firm can take on is affected by

1. the Principal/Agent relationship between debt and equity investors.
2. covenants in the debt instruments.
3. market risk.
4. all of the above.

5)  The tax deductibility of interest results in a lower cost of capital for the firm.

      True/False

6)Firms in the Death Stage will typically increase their debt load.

      True/False

Answer 1

1)   When you go through an IPO you

C) sell shares to the general public.

2) In the Principal/Agent relationship the Agent has

(D) superior knowledge.

3)   Which of the following is not an example of a Principal/Agent relationship?

In a principal agent relationship, the agent works on behalf of the principal. From the options the answer is

D) Management/Debt Holder as management works for the debt holder and not the other way round

4) The amount of debt that a firm can take on is affected by

As decision on taking debts are affected by number of factors like the principal agent relationship between debt and equity investors, covenants specified by the creditor and the market risk and other risks, the answer is

D) All of the above

5) The tax deductibility of interest results in a lower cost of capital for the firm.- True

6) Firms in the Death Stage will typically increase their debt load.- True. This is because firms at the declining stage the profit falls as well as the retained earnings thus according to the pecking order theory more debt financing is resorted to.