4211 Quiz 5
which of the following does a firm consider in the choice of securities issued
-tax consequences -transaction costs -whether chosen security will have fair price in the market
This is NOT one of MM set of conditions referred to as perfect capital markets
All investors hold the efficient portfolio of assets.
Following the absolute priority rule, what is the correct order for post-bankruptcy payments?
DIP, Senior, Junior, Equity
which transaction has the most asymmetric information between counterparties?
buying a used car
a bankruptcy process is complex, time-consuming, and costly. the costs of bankruptcy include
costs of hiring legal experts, appraisers, and auctioneers
A firm's _____ ratio is the function of the firm's total value that corresponds to debt
debt to value
t/f: debt overhang is defined as a situation in which a firm has so much debt that it invests in negative npv projects in order to do something with the debt proceeds
false
If the only market imperfection is the existence of taxes, then a firm's stock price must _____ upon the announcement of a new debt issuance
go up
firms in industries such as biotech tend to have _____ distress costs because of a small proportion of tangible assets and volatile cash flows
high
when investors use leverage in their own portfolios to adjust the leverage choice made by the firm, it is referred to as
homemade leverage
leverage can _____ a firm's expected earnings per share, but does not necessarily increase the share price
increase
in a setting where there is no risk that a firm will default, leverage_____ the risk of equity
increases
it is not correct to discount the cash flows of a levered firm with the cost of equity of the unlevered firm because
leverage increases the risk of the equity of the firm
equity in a firm with debt is called
levered equity
the optimal capital structure depends on _____ such as taxes, distress costs, and agency costs
market imperfections
managerial entrenchment means that managers _____ and run the firm for their own best interests
may face little threat of being fired
investment cash flows are independent of financing choices in a
perfect capital market
one of the factors that determine the present value of financial distress costs is
probability of financial distress
the peking order hypothesis states that managers will have a preference to fund investment by using _____, then _____, and _____ as a last resort
retained earnings, debt, equity
which security has the lowest direct issuance costs?
standard bonds
t/f: equity-debt holder conflicts are more likely to arise if the risk of financial distress is high
true
t/f: relative to an owner managed firm, a publicly traded firm has higher agency costs and more efficient risk bearing
true
a firm's overall cost of capital that is a blend of the costs of the different sources of capital is known as the firm's
weighted average cost of capital
According to Modigliani and Miller
with perfect capital markets, the total value of a firm should not depend on its capital structure