13-21 Suppose someone borrows from a bank to buy a new car. A few months later, the borrower realizes that he will have to default on this loan in a few months, after which the bank will repossess the car. What kind of underinvestment problem might occur here?

13-22 Suppose a commercial bank suffers loan losses so severe that it approaches insolvency. What kinds of asset substitution problems might arise? How might bank regulators act to prevent these problems?

13-23 Another type of agency problem is overinvestment, in which managers invest in negative-NPV projects to increase the size of the firm (as measured by sales or assets). Explain how debt constrains this behavior.

13-24 If a firm has to sell new shares of stock to the public to raise the financing necessary to invest in a project with a small positive NPV, should it do it?

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1321 In this scenario the underinvestment problem arises due to moral hazard Moral hazard occurs when one party in this case the borrower has an incen... View the full answer