Applying the M-M Theorem: In the presence of information asymmetry between insider/manager and outside investors, which of the following should produce larger firm value for a pre-IPO startup firm?

Applying the M-M Theorem: In the presence of information asymmetry between insider/manager and outside investors, which of the following should produce larger firm value for a pre-IPO startup firm?

a. Private equity financing from Venture Capital
b. Debt financing from Banks
c. Debt financing from Insurance Companies
d. None of the above financing method will produce larger firm value


Answer: a. Private equity financing from Venture Capital

Applying the M-M Theorem: When there is NO market imperfection, which of the following corporate financing should produce larger firm value?

Applying the M-M Theorem: When there is NO market imperfection, which of the following corporate financing should produce larger firm value?

a. Debt financing from Banks
b. Public equity financing from Initial Public Offering (IPO)
c. Private equity financing from Venture Capital
d. None of the above financing method will produce larger firm value


Answer: d. None of the above financing method will produce larger firm value

Which of the followings are Capital Market Imperfections: I) Agency Costs; II) Corporate Governance and Control; III) Financial Distress; IV) Information Asymmetry; V) Taxes.

Which of the followings are Capital Market Imperfections: I) Agency Costs; II) Corporate Governance and Control; III) Financial Distress; IV) Information Asymmetry; V) Taxes.

a. I, II, and III only
b. I, II, and V only
c. I, II, III, and IV only
d. I, II, III, IV, and V


Answer: d. I, II, III, IV, and V

Informational asymmetry exists when:

Informational asymmetry exists when:

a. Insider/manager has less information than outsider/shareholders
b. Insider/manager has more information than outsider/shareholders
c. Insider/manager and outsider/shareholders share the same set of information
d. There is no outsider in the corporate financial system


Answer: b. Insider/manager has more information than outsider/shareholders

In the principal-agent framework:

In the principal-agent framework:

a. Managers are both the agents and the principals
b. Shareholders are both the principals and the agents
c. Shareholders are the principals; Managers are the agents
d. Managers are the principals; Shareholders are the agents


Answer: c. Shareholders are the principals; Managers are the agents

The corporate financial goal of a firm is to:

The corporate financial goal of a firm is to:

a. Maximize cash holding to managers
b. Maximize firm size and number of investment projects
c. Maximize firm value to shareholders
d. Maximize managers' private jets


Answer: c. Maximize firm value to shareholders

Shareholders of a corporation may include: I) Banks and Insurance Companies; II) Hedge Funds; III) Investment Advisors; IV) Venture Capital; V) Individual Investors.

Shareholders of a corporation may include: I) Banks and Insurance Companies; II) Hedge Funds; III) Investment Advisors; IV) Venture Capital; V) Individual Investors.

a. I, III, and V only
b. I, II, III, and IV only
c. I, II, IV, and V only
d. I, II, III, IV, and V


Answer: D

The Corporate Financial System includes: I) Firm; II) Manager; III) Capital Market Investors.

The Corporate Financial System includes: I) Firm; II) Manager; III) Capital Market Investors.

a. I only
b. I and III only
c. II and III only
d. I, II, and III


Answer: D

Firm value may include: I) Tangible Assets; II) Intangible Assets; III) Cash Flows; IV) Growth Options.

Firm value may include: I) Tangible Assets; II) Intangible Assets; III) Cash Flows; IV) Growth Options.

a. I and II only
b. I and III only
c. I, II, and III only
d. I, II, III, and IV


Answer: D

Which of the following is a definition of the firm: I) Firm is legal entity; II) Firm is a value creation process; III) Firm is a collection of investment and financing opportunities; IV) Firm is a nexus of incomplete contracts.

Which of the following is a definition of the firm: I) Firm is legal entity; II) Firm is a value creation process; III) Firm is a collection of investment and financing opportunities; IV) Firm is a nexus of incomplete contracts.

a. I and II only
b. I and III only
c. I, II, and III only
d. I, II, III, and IV


Answer: D