CF dividend policy - Opdrachten
30 important questions on CF dividend policy - Opdrachten
Is it true that MM's propositions assume perfect financial markets, with no distorting taxes or other imperfections?
Is it true that MM's proposition 1 says that corporate borrowing increases earnings per share but reduces the price-earnings ratio?
Is it true that MM's proposition 2 says that the cost of equity increases with borrowing and that the increase is proportional to D/V, the ratio of debt to firm value?
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Is it True that MM's proposition 2 assumes that increased borrowing does not affect the interest rate on the firm's debt
Is it true that borrowing does not increase the financial risk and the cost of equity if there is no risk of bankruptcy?
Is it true that borrowing increases firm value if there is a clientele of investors with a reason to prefer debt?
Is it a valid objection that MM's totally ignore the fact that as you borrow more, you have to pay higher rates of interest?
What is wrong with the following argument: As the firm borrows more and debt becomes risky, both stockholders and bondholders demand higher rates of return. Thus by reducing the debt ratio, we can reduce both the cost of debt and the cost of equity, making everybody better off.
What is wrong with the following argument: Moderate borrowing doesn't significantly affect the probability of financial distress or bankruptcy. Consequently, moderate borrowing won't increase the expected rate of return demanded by stockholders
Why is the following statement false or misleading?: A capital investment opportunity offering a 10% DCF rate of return is an attractive project if it can be 100% debt-financed at an 8% interest rate.
Why is the following statement false or misleading?: The more debt the firm issues, the higher the interest rate it must pay. That is one important reason why firms should operate at conservative debt levels.
Can you invent any new kinds of debt that might be attractive to investors? Why do you think they have not been issued?
securities that represented various attributes of a share), preferred equity redemption cumulative
stock (is a convertible preferred stock with an enhanced dividend that is limited in term and
participation) and floating-rate notes (bonds that have a variable coupon, equal to a money market
reference rate, like LIBOR or federal funds rate, plus a quoted spread). Note that, in order to succeed,
such securities must both meet regulatory requirements and appeal to an unsatisfied clientele
Imagen a firm that is expected to produce a level stream of operating profits. As leverage is increased, what happens to the ratio of the market value of the firm to income before interest if MM are right?
A Firm can't use interest tax shield unless it has (taxable) income to shield. What does this statement imply for debt policy?
- A firm with no taxable income saves no taxes by borrowing and paying interest.
- The interest payments would simply add to its tax-loss carry-forward. Such a firm would have little tax incentive to borrow
What are the costs of going bankrupt?
A company can incur costs of financial distress without ever going bankrupt. How can this happen?
What are Tangible assets?
What is meant with the market value?
What is meant with the book value?
Book Value = Total Assets – Total Liabilities – Preferred Stock – Intangible Assets
Rajan and Zingales identified four variables that seemed to explain differences in debt ratios in several countries. What are the four variables?
Debt ratios tend to be higher for larger firms and those with more tangible assets. Conversely, more profitable firms and firms with higher market-to-book values have lower debt ratios.
Pecking-order theory: Why does asymmetric information push companies to raise external funds by borrowing rather than by issuing common stock?
- When a company issues securities, outside investors worry that management may have unfavorable information. If so the securities can be overpriced. This worry is much less with debt than equity. Debt securities are safer than equity, and their price is less affected if unfavorable news comes out later.
- A company that can borrow (Without incurring substantial costs of financial distress) usually does so. An issue of equity would be read as "bad news" by investors, and the new stock could be sold only at a discount to the previous market price.
According to the pecking-order theory, the firm's debt ratio is determined by........
According to the pecking-order theory, debt ratios depend on past profitability, because..........
What is meant with financial slack?
For what kinds of companies are financial slack most valuable? Is there situation in which financial slack should be reduced by borrowing and paying out the proceeds to the stockholders?
Agency costs: The SOS company has financed a large part of its facilities with long-term debt. There is a significant risk of default, but the company is not on the ropes yet. Explain why SOS stockholders could lose by investing in a positive-NPV project financed by an equity issue.
.Agency costs: The SOS company has financed a large part of its facilities with long-term debt. There is a significant risk of default, but the company is not on the ropes yet. Explain Why sos stockholders could gain by investing in a negative NPV project financed by cash
.Agency costs: The SOS company has financed a large part of its facilities with long-term debt. There is a significant risk of default, but the company is not on the ropes yet. Explain why SOS stockholders could gain from paying out a large cash dividend.
What is meant with the "fine print" in terms of contracts?
Who benefits from the fine print in bond contracts when the firm gets into financial trouble?
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