QUESTION 1

Which of the following statements is/are TRUE?

Debt overhang can lead to overinvestment as well as underinvestment.

The conceptually correct cost of capital for a project depends on the risk of the project, not on the characteristics of the company considering the project i.e. it should be project specific.

According to the trade-off theory of capital structure, optimal capital structure occurs when the stockholders' right to default is balanced by the bondholders' right to get interest and principal payments.

A.

I only.

B.

II only.

C.

III only.

D.

II and III only.

E.

None of the statements is true.