Question 1

The majority of external finance comes from corporate bond issues.

Accepted Answer

A) True 
 B)False

Question 2

A possible problem with Sarbanes-Oxley is that it increases transactions costs for financial intermediaries.

Accepted Answer

A) True 
 B)False

Question 3

To mitigate agency problems, the incentives of the employees should be closed aligned with the employer.

Accepted Answer

A) True 
 B)False

Question 4

When banks refuse to lend to borrowers with low net worth, they are trying to alleviate moral hazard problems.

Accepted Answer

A) True 
 B)False

Question 5

How does compensating company managers with stock help with agency problems? What is the potential problem with this solution?

Accepted Answer

The answer of How does compensating company managers with stock...

Question 6

Asymmetric information problems increase costs to both borrowers and lenders.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following is a technique lenders use to alleviate asymmetric information problems?

Accepted Answer

A)  checking credit ratings 
B)  monitoring borrower activity 
C)  restrictive covenants 
D)  all of the above

Question 8

How does the free-rider problem affect the size of the firms with access to the IPO market?

Accepted Answer

The answer of How does the free-rider problem affect the...

Question 9

The majority of funds raised by firms is done through internal finance.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following does NOT involve a financial intermediary?

Accepted Answer

A)  saving for retirement 
B)  taking a loan to start a business 
C)  buying stock online 
D)  none of the above

Question 11

Explain why some argue that collateral is used to minimize both adverse selection and moral hazard problems.

Accepted Answer

The answer of Explain why some argue that collateral is...

Question 12

Joey's Bank decides to make loans only to agricultural firms. Explain the pros and cons of this decision in terms of diversification and specialization.

Accepted Answer

The answer of Joey's Bank decides to make loans only...

Question 13

The majority of internal finance for firms comes from loans for intermediaries.

Accepted Answer

A) True 
 B)False

Question 14

Legislation banning fraudulent financial documentation is intended to reduce

Accepted Answer

A)  agency costs. 
B)  moral hazard problems. 
C)  asymmetric information. 
D)  all of the above.

Question 15

How do efficiency wages reduce agency costs?
.

Accepted Answer

The answer of How do efficiency wages reduce agency costs?
....

Question 16

Sarbanes-Oxley was intended to reduce

Accepted Answer

A)  asymmetric information. 
B)  allocational efficiency. 
C)  transactions costs. 
D)  all of the above.

Question 17

Which of the following are examples of transactions costs faced by lenders?

Accepted Answer

A)  accounting fees 
B)  legal fees 
C)  monitoring costs 
D)  all of the above

Question 18

What does IPO stand for? What is it?

Accepted Answer

The answer of What does IPO stand for? What is...

Question 19

Which of the following is a technique lenders use to alleviate moral hazard problems?

Accepted Answer

A)  specialized lending 
B)  diversified lending 
C)  requiring collateral 
D)  all of the above

Question 20

Banks commonly monitor the activities and check the credit ratings of borrowers. Which solves the moral hazard problem, and which solves the adverse selection problem? Explain briefly.

Accepted Answer

The answer of Banks commonly monitor the activities and check...

Exam 8: Financial Structure, Transaction Costs, and Asymmetric Information

The majority of external finance comes from corporate bond issues.

A possible problem with Sarbanes-Oxley is that it increases transactions costs for financial intermediaries.

To mitigate agency problems, the incentives of the employees should be closed aligned with the employer.

When banks refuse to lend to borrowers with low net worth, they are trying to alleviate moral hazard problems.

How does compensating company managers with stock help with agency problems? What is the potential problem with this solution?

Asymmetric information problems increase costs to both borrowers and lenders.

Which of the following is a technique lenders use to alleviate asymmetric information problems?

How does the free-rider problem affect the size of the firms with access to the IPO market?

The majority of funds raised by firms is done through internal finance.

Which of the following does NOT involve a financial intermediary?

Explain why some argue that collateral is used to minimize both adverse selection and moral hazard problems.

Joey's Bank decides to make loans only to agricultural firms. Explain the pros and cons of this decision in terms of diversification and specialization.

The majority of internal finance for firms comes from loans for intermediaries.

Legislation banning fraudulent financial documentation is intended to reduce

How do efficiency wages reduce agency costs? .

Sarbanes-Oxley was intended to reduce

Which of the following are examples of transactions costs faced by lenders?

What does IPO stand for? What is it?

Which of the following is a technique lenders use to alleviate moral hazard problems?

Banks commonly monitor the activities and check the credit ratings of borrowers. Which solves the moral hazard problem, and which solves the adverse selection problem? Explain briefly.