Question 21 Assume the cash flows arising from a project are the only potential source of cash flow for a company and the company currently owes l million debt at an interest rate of 15% per annum. In one year's time, the project will either yield a cash inflow of 2 million with a probability of 30% or a cash inflow of 5 million with a probability of 70%. In one year's time, the company will be closed and the proceeds distributed to shareholders. What is the expected cash inflow for shareholders in one year's time? A. 0.64 million B. 1.87 million C. 2.95 million D. 4.1 million Question 22 For which type of firm is financial distress especially costly? A. Firms whose product quality is not an important factor. B. Firms whose products that do not require follow-up service. C. Firms with extremely low leverage. D. Firms whose employees and suppliers require specialised training. Question 23 Which one of the following is an example of potential conflict (agency problem) between managers and shareholders? A. Merging with companies in other industries to diversify risk. B. The level of debt financing. C. Spending on corporate perquisites (ie. purchase of a new corporate jet). D. All of the others could give rise to agency problems Question 24 Which of the following is true of the reluctance to liquidate problem? A. Debt provides an incentive for firms to take on unnecessary risk, substituting riskier investment projects for less risky projects. B. Managers tend to pass up positive NPV projects because most of the benefits accrue to debtholders C. Equity holders have a tendency to liquidate the firm even if the value of the ongoing operations is higher than liquidation, D. None of the above