1. Under-investment occurs in a distressed firm where managers invest in highly risky projects (negative NPV) at the cost of creditors in order to benefit shareholders.

TRUE

FALSE

2. It may not be optimal for an American call option holder to exercise the option early when there is an opportunity to earn a profit.

TRUE

FALSE

3. The credit rating of the bonds issued in an LBO is usually at investment grade because the targets are mainly high growth firms.

TRUE

FALSE

4. In a stock swap merger, the ownership of the bidder will be diluted.

TRUE

FALSE

5. Empirical research consistently documents price drops on the announcement of equity raising. A generally accepted explanation is that managers may choose to sell more shares when market tend to undervalue the shares.

TRUE

FALSE

Justify here in no more than 50 words each. Thanks !