Question : 8.5   How Moral Hazard Affects the Choice Between Debt and : 1373701

 

8.5   How Moral Hazard Affects the Choice Between Debt and Equity Contracts

 

1) Equity contracts

A) are claims to a share in the profits and assets of a business.

B) have the advantage over debt contracts of a lower costly state verification.

C) are used much more frequently to raise capital than are debt contracts.

D) are not subject to the moral hazard problem.

 

2) A problem for equity contracts is a particular type of ________ called the ________ problem.

A) adverse selection; principal-agent

B) moral hazard; principal-agent

C) adverse selection; free-rider

D) moral hazard; free-rider

 

3) Moral hazard in equity contracts is known as the ________ problem because the manager of the firm has fewer incentives to maximize profits than the stockholders might ideally prefer.

A) principal-agent

B) adverse selection

C) free-rider

D) debt deflation

 

4) Managers (________) may act in their own interest rather than in the interest of the stockholder-owners (________) because the managers have less incentive to maximize profits than the stockholder-owners do.

A) principals; agents

B) principals; principals

C) agents; agents

D) agents; principals

5) The principal-agent problem

A) occurs when managers have more incentive to maximize profits than the stockholders-owners do.

B) in financial markets helps to explain why equity is a relatively important source of finance for American business.

C) would not arise if the owners of the firm had complete information about the activities of the managers.

D) explains why direct finance is more important than indirect finance as a source of business finance.

 

6) The recent Enron and Tyco scandals are an example of

A) the free-rider problem.

B) the adverse selection problem.

C) the principal-agent problem.

D) the “lemons problem.”

 

7) The name economists give the process by which stockholders gather information by frequent monitoring of the firm’s activities is

A) costly state verification.

B) the free-rider problem.

C) costly avoidance.

D) debt intermediation.

 

8) Because information is scarce

A) helps explain why equity contracts are used so much more frequently to raise capital than are debt contracts.

B) monitoring managers gives rise to costly state verification.

C) government regulations, such as standard accounting principles, have no impact on problems such as moral hazard.

D) developing nations do not rely heavily on banks for business financing.

 

9) Government regulations designed to reduce the moral hazard problem include

A) laws that force firms to adhere to standard accounting principles.

B) light sentences for those who commit the fraud of hiding and stealing profits.

C) state verification subsidies.

D) state licensing restrictions.

10) One financial intermediary in our financial structure that helps to reduce the moral hazard from arising from the principal-agent problem is the

A) venture capital firm.

B) money market mutual fund.

C) pawn broker.

D) savings and loan association.

 

 

 

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