1. Holding other things constant, firms respond to a decrease in tax rate by issuing more debt II. Holding other things constant, firms respond to a decrease in tax rate by issuing less debt III. Firms issue debt only when they have investment opportunities that they cannot finance with internal sources a. I b. II c. I, III d. II, III ) The value of HILEV firm at the end of one year can be $50 m or $100 m with equal probability of 0.5. The firm has debt with a face value of $50 111 that matures in one year. Assume that investors are risk- neutral and the risk free rate is zero. The CEO of the firm decides to substitute assets of the firm with more risky assets immediately, so that the value of the firm at the end of one year is either $30 In or $120 In with equal probability of 0.5. This asset substitution will lead to A gain of $10 million for stockholders and a loss of $10 million for bondholders Aloss of $10 million for stockholders and a gain of $10 million for bondholders No gain or loss to debtholders or equity holders Both debtholders and equity holders will lose $10 million from the increased risk of the business P'PP'P ) Which of the following happens when a distressed firm issues debt senior to the existing debt? a. Claim dilution b. Asset substitution c. Underinvestment d. Adverse selection