MM and Miller also assumed that debt is riskless. How does the possibility of default on debt

Question:

MM and Miller also assumed that debt is riskless. How does the possibility of default on debt cause equity to take on the characteristics of an option? What types of incentives for shareholders does this lead to?

Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For book-img-for-question

Intermediate Financial Management

ISBN: 978-1111021573

10th Edition

Authors: Brigham, Daves

See More Books

Question Posted: Feb 03, 2012 01:50 AM

See More Questions

Explain the concept of financial intermediation.How does the possibility of financial intermediation increase the efficiency of the financial system?
MM and Miller assumed that firms do not grow. If the grow, how would this affect the value of the debt tax shield? What does growth do to the required rate of return on equity and the WACC as a firm...
Shareholders equity is accounted for by source. What does source mean?
Cindy purchased a building for $1,000,000. How should she deal with the expense on her tax return? a) She must deduct the $1,000,000 in the year of purchase. b) She must not deduct anything and wait...
Infusionsoft conducted a study to explore the attitudes, behaviors, and challenges that small businesses face related to sales and marketing. Small business owners were categorized by the amount they...
Refer to Figure 17.4d. Explain how the cell value of 5.5 (row 2, column 2) is derived. Is it the least accumulative cost? 4.0 3.0 1.5 0 3.5 5.5 2.0 1.5 (d) 4.0 2.8 6.7 4.5 0 5.5 1.0 9.5
Apply a CART model for predicting churn. Use default misclassification costs. Construct a table containing the following measures: a. Accuracy and overall error rate b. Sensitivity and false-positive...
Rebecca holds 100 shares of Gotchas stock that she purchased for $1,000 several years ago. In a merger of Gotchas into Solis, Inc., Rebecca exchanges her 100 Gotchas shares for 1,000 Solis shares and...
Choos e a ny business firm / organization. Explain through a precise example the difference s in terms of decision making performed in a TPS and ESS of this firm . ( 5 marks )
1. Do you think a call center would benefit Bangmod at this point? What benefits could it provide? 2. From the case, identify items of importance in terms of designing the call center and rank them...
What is the essence of Millers contribution to the theory of capital structure, and how does it relate to the earlier MM with-taxes position?
Define each of following terms: a. MM Proposition I without taxes; with corporate taxes b. MM Proposition II without taxes; with corporate taxes c. Miller model d. Financial distress costs e. Agency...
Use technology to find the following values: 25, 72, 77, 31, 80, 80, 64, 39, 75, 58, 43, 67, 54, 71, 60 (a) The mean and the standard deviation. (b) The five number summary.
5.Descibe the HSI color image model 6. Describe the basic relationship between the pixels
1. What is the need for transform? 2. What is Image Transform? 3. What are the applications of transform? 4. Give the Conditions for perfect transform . 5. What are the properties of unitary...
6. Define Fourier transform pair 7. Define Fourier spectrum and spectral density 8. Give the relation for 1-D discrete Fourier transform pair 9. Specify the properties of 2D Fourier transform. 10....
16. What is wrap around error? 17. Give the formula for correlation of 1D continuous function. 18. What are the properties of Haar transform. 19. What are the Properties of Slant transform 20....
21. Define fast Walsh transform. 22. Give the relation for 1-D DCT. 23. Write slant transform matrix SN. 24. Define Haar transform. 25. Define K-L transform. 26. Give the equation for singular value...
Machado Inc. purchased a new robotic drill for its assembly line operation. The total cost of the asset was $125,000, including shipping, installation, and testing. The asset is expected to have a...
What are the before image (BFIM) and after image (AFIM) of a data item? What is the difference between in-place updating and shadowing, with respect to their handling of BFIM and AFIM?
The residual income model separates the value of the firm into two basic components. What are these two components? a. The current book value and the present value of future earnings b. The value of...
Cairn Communications is trying to estimate the first-year operating cash flow (at t = 1) for a proposed project. The financial staff has collected the following information: Projected sales...
Cairn Communications is trying to estimate the first-year operating cash flow (at t = 1) for a proposed project. The financial staff has collected the following information: Projected sales...
Allen Air Lines is now in the terminal year of a project. The equipment originally cost $20 million, of which 80% has been depreciated. Carter can sell the used equipment today to another airline for...
Al preparar el estado de resultados pro forma, cules de las siguientes partidas se deducen de las utilidades brutas para llegar a las ganancias despus de impuestos? Pregunta de seleccin mltiple....
Lawson Inc. is expanding its manufacturing plant, which requires an investment of $4 million in new equipment and plant modifications. Lawson's sales are expected to increase by $3 million per year...
20 On January 1, Year 1, X Company purchased equipment for $80,000. The company estimates that the equipment will have a useful life of 10 years and a residual value of $5,000. X Company depreciates...

MM and Miller also assumed that debt is riskless. How does the possibility of default on debt

Question:

Step by Step Answer:

If corporate debt is actually risky rather than riskless as MM assumed then managers really have the ...View the full answer

Intermediate Financial Management

Students also viewed these Corporate Finance questions