One key value of limited liability is that it lowers owners risks

Question

One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value.

a. True

b. False

Answer

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Related questions

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Q: A firm is considering a new project whose risk is greater than the risk of the firm's average project, based on all methods for assessing risk. In evaluating this project, it would be reasonable for management to do which of the following? a. Increase the estimated NPV of the project to reflect its greater risk. b. Reject the project, since its acceptance would increase the firm's risk. c. Ignore the risk differential if the project would amount to only a small fraction of the firm's total assets. d. Increase the cost of capital used to evaluate the project to reflect its higher-than-average risk. e. Increase the estimated IRR of the project to reflect its greater risk.

Q: Wansley Enterprises is considering a new project. The company has a beta of 1.0, and its sales and profits are positively correlated with the overall economy. The company estimates that the proposed new project would have a higher standard deviation and coefficient of variation than an average company project. Also, the new project's sales would be countercyclical in the sense that they would be high when the overall economy is down and low when the overall economy is strong. On the basis of this information, which of the following statements is CORRECT? a. The proposed new project would increase the firm's corporate risk. b. The proposed new project would increase the firm's market risk. c. The proposed new project would not affect the firm's risk at all. d. The proposed new project would have less stand-alone risk than the firm's typical project. e. The proposed new project would have more stand-alone risk than the firm's typical project.

Q: Tallant Technologies is considering two potential projects, X and Y. In assessing the projects' risks, the company estimated the beta of each project versus both the company's other assets and the stock market, and it also conducted thorough scenario and simulation analyses. This research produced the following data: Project X Project Y Expected NPV $500,000 $500,000 Standard deviation (σNPV) $200,000 $250,000 Project beta (vs. market) 1.4 0.8 Correlation of the project cash flows with cash flows from currently existing projects. Cash flows are not correlated with the cash flows from existing projects. Cash flows are highly correlated with the cash flows from existing projects. Which of the following statements is CORRECT? a. Project X has more corporate (or within-firm) risk than Project Y. b. Project X has more market risk than Project Y. c. Project X has the same level of corporate risk as Project Y. d. Project X has less market risk than Project Y. e. Project X has more stand-alone risk than Project Y.

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Q: Opportunity costs include those cash inflows that could be generated from assets the firm already owns if those assets are not used for the project being evaluated. a. True b. False

Q: Since the focus of capital budgeting is on cash flows rather than on net income, changes in noncash balance sheet accounts such as inventory are not included in a capital budgeting analysis. a. True b. False

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