ch 16 capital structure 2

conflicts of interest between stockholders and bondholders are known as:

agency costs

the MM theory with taxes implies that firms should issue maximum debt. In practice, this is not true because:

bankruptcy is a disadvantage to debt

one of the indirect costs to bankruptcy is the incentive toward under investment. Following this strategy may result in:

both the firm turning down positive NPV projects that it would clearly accept in an all equity firm; and stock holders contributing the full amount of the investment, but both stockholders and bondholders sharing in the benefits of the project

the pecking order stats how financing should be raised. In order to avoid asymmetric information problems and misinterprestation of whether management is sending a signal on security overvaluation, the firm's first rule is to:

finance with internally generated funds

studies have found that firms with high proportions of intangible assets are likely to use __________ debt compared with firms with low proportions of intangible assets

less

if a firm issues debt but writes protective and restrictive covenants into the loan contract, then the firm's debt may be issued at a __________ interest rate compared with otherwise similar debt.

lower

the optimal capital structure of a firm _________ the marketed claims and _________ the nonmarketed claims agains the cash flows of the firm

maximized , minimizes

although the use fo debt provides tax benefits to the firm, debt also puts pressure on the firm to:

meet interest and principal payments which, if not met, can put the compnay into financial distress

the optimal capital structure:

of a firm will vary over time as taxes and market conditions change

when shareholders pursue selfish strategies such as taking large risks or paying excessive dividends, these will result in:

posititve agency costs, as bondholders impose various restrictions and convenants which will diminish a firm value

given realistic estimates of the probability and cost of bankruptcy, the future costs of a possible bankruptcy are borne by:

shareholders because debtholders will pay less for the debt providing less cash for the shareholders

one of the indirect costs of bankruptcy is the incentive for managers to ake large risks. when following this strategy:

stockholders expropriate value from bondholders by selecting high risk projects

what three factors are important to consider in determining a target debt to equity ratio?

taxes, asset types, and uncertainty of operating income

covenants restricting the use of leasing and additional borrowings primarily protect:

the debtholders from the added risk of dilution of their claims

when graphing firm value agains debt levels, the debt level that maximizes the value of the firm is the level where:

the increase in the present value of distress costs from an additional dollar of debt is equal to the increase in the present value of debt tax shield