Questions and Answers of Capital Structure Decision

3. Does the current capital structure influence who is in a position to be the bidder or who becomes the target in an M&A?
2. Which combination of the method of payment and the source of financing prevails empirically, and what is the reasoning for this observation?
1. What are the main motives for payments with stock or cash in corporate takeovers?
4. Why does an issuer’s stock price typically drop following the announcement of a PIPE financing?
3. Why do PIPE shares sell at a discount?
2. At whose expense are hedge funds profiting through PIPE deals?
1. What benefits does a PIPE offering provide an issuer over a traditional private placement?
4. What are the strengths and weaknesses of the different nontax models in explaining the empirical data on leasing?
3. What are the strengths and weaknesses of the tax-based models in explaining leasing?
2. What are the arguments for and against treating leases as a substitute for debt?
1. What are the unique features of lease contracts as described in Smith and Wakeman (1985), Schallheim (1994), Eisfeldt and Rampini (2009), and Gavazza (2010)?
4. How can the differing cases on fiduciary duties be reconciled?
3. What economic principles can be used to disperse the fear that shareholders may use debt for opportunistic behavior?
2. What is the fear courts have regarding the relationship among directors, shareholders, and creditors?
1. What is the economic justification for fiduciary duties if the parties can freely contract?
4. Explain the impact of “too big to fail” and similar bailout policies on the optimal capital structure, ex-ante.
3. Explain the importance of considering the financial risk of rivals, customers, suppliers, and other counter-parties. What evidence suggests these considerations are material?
2. Explain the conflicts of interest among stakeholders in a financially distressed firm and how these conflicts potentially destroy firm value.
1. Why has Chapter 11 historically been characterized as “prodebtor”? How might the amendments to the U.S. Bankruptcy Code in 2005 alter this characterization?
4. Empirical evidence shows an abnormally positive and statistically significant return for lessee firms that announce an SLB but not a significant return for the lessor. What explains this
3. Are SLB transactions likely to increase or decrease during a recession? Why?
2. Some dismiss earnings management and manipulation of financial ratios as dubious motives for SLB transactions. Why might a financial manager still choose to use them for these reasons?
1. Consider a firm that purchased its headquarters with a low interest rate mortgage loan. Why might the firm want to sell the building and lease it back, even if the implied rate of interest on the
4. How does evidence from bankruptcies support using secured debt to improve monitoring and efficient liquidation?
3. How strong is the evidence supporting the use of secured debt to signal borrower quality?
2. What is the link between bank debt and secured debt?
1. What is secured debt?
4. Explain whether competition in ratings should be encouraged or discouraged?
3. Do the various regulatory uses of credit ratings make sense? Why or why not?
2. In what ways do users rely on credit ratings? Should their reliance be reduced?Why or why not?
1. Given that future events are inherently difficult to predict, and that the ways in which predictions can fail also are unpredictable, is speaking of the quality of credit ratings and of the
4. When a loan market becomes more competitive due to the entry of new banks headquartered in other markets, how does this affect the use of collateral?
3. Bankers and bond rating agencies state that when a borrower pledges collateral, the result is lower risk on a loan. Empirical research documents that, on average, secured loans carry higher yield
2. The empirical evidence is mixed as to whether the relationship between loan maturity and rate spreads is positive or negative. What explanations exist for either finding?
1. Both benefits and costs are associated with forming bank relationships. How can a bank relationship prove costly to the bank? How can it prove costly to the borrower?
4. Why might relationships between banks and firms push the government to protect banks from failure in times of economic uncertainty?
3. Following the collapse of much of the banking sector in 1933, the Glass–Steagall Act separated banks based on their types of business. Why might price stabilization contribute to financial
2. How could conflicts of interest in universal banking lead to reduced costs of borrowing for firms? What evidence is against this particular conflict of interest?
1. Rajan (1992) trades off the monitoring benefits of banking relationships against the hold-up costs. Suppose a firm borrows to pay off a bank loan. Is this good news or bad news for shareholders?
3. Fan and So (2004) use surveys as a tool to measure changes in managers’ beliefs about capital structure. Describe the study of Fan and So (2004) and discuss why managers may have changed their
2. Titman (1984) argues that the liquidation of a firm may impose costs on both customers and employees. As a result, they demand risk premiums on products and wages when leverage increases. These
1. What are the strengths and weaknesses of survey research when compared to other empirical research methods in the corporate finance literature?
4. Briefly discuss the survey evidence on market timing in financing decisions. Is survey evidence consistent with findings in empirical studies?
3. Does a country’s institutional and legal system play a major role in corporate financing decisions? If so, how?
2. Survey evidence shows striking differences in the responses of large and small firms? What factors might explain these differences?
1. What are the major limitations of the survey method, and how can researchers address them?
4. Why did the regulated electric utilities display higher leverage compared to nonregulated manufacturing firms? How and why did this change after deregulation of the U.S. electricity market?
3. What does empirical evidence say about the similarity of the capital structure decisions of firms across counties?
2. What are the industry and firm-specific nonfinancial characteristics from a theoretical and empirical perspective that significantly influence the financing decision of firms?
1. What theories explain the capital structure decisions of regulated versus nonregulated firms?
6. What are the advantages and disadvantages of unlevering betas and then relevering them in estimating the cost of capital?
5. What are the practical difficulties of using the CAPM to estimate the cost of equity?
4. What is the disadvantage of using a market risk premium based on historical averages of past returns?
3. Why is the WACC typically based on market value weights of debt and equity?
2. What factors might analysts use to select comparable firms?
1. Is a firm’s WACC always the appropriate hurdle rate for its investments? If not, why not?
4. Explain why Microsoft and some other large profitable firms in the software industry use practically zero debt in their capital structure. How should Microsoft’s capital structure change if it
3. Propose and discuss the potential capital structure–related impact of government response to the corporate scandals during 2000 and 2003 and the financial crisis during 2008 and 2009. Discuss
2. Explain the mean reversion of capital structure. What is the difficulty of conducting econometric research on mean reversion? What is the problem with taking a firm’s historical average
1. Explain the long-term underperformance of firms issuing equity.
4. Propose and discuss methods to account for persistent market imperfections in capital budgeting decision making. Explain how such imperfections affect the MM model.
3. What complications exist when valuing investment projects of closely-held firms? Describe the conventional approach to determining the appropriate risk premium for such firms and discuss if the
2. Consider tax savings and financial distress costs in estimating the effect of financial leverage on firm value. What role does the discount rate of the tax savings play in the MM model? Discuss
1. Explain the probable forms of the cost-of-debt function and the reasons for a specific relationship between the cost of debt and levered equity.
6. Which effects can capital structure adjustments have on firm value, competitiveness, and relation to shareholders?
5. How can a significant positive speed of adjustment of capital structure determine whether pecking order or market timing is the more prominent theory?
4. Is the trade-off theory or the pecking order theory the main theory behind capital structure decisions?
3. What underlying hypotheses may explain capital structure choice?
2. How has the capital structure literature evolved since 1958?
1. What are the main firm-specific determinants of corporate capital structure?
4. Does the pecking order theory explain the changes in capital structure across countries with different information asymmetry? Why or why not?
3. The trade-off theory of capital structure predicts that firms have optimal (target)debt ratios. Discuss the differences in the rate of adjustment toward optimal capital structure across countries
2. Prior research establishes that a firm’s capital structure is not only influenced by firm-specific factors but also by a country’s legal traditions. Discuss how legal systems affect firms’
1. Identify and discuss the impact of firm-specific and macroeconomic factors on capital structure decisions around the world.
4. The large corporation in which managers serve as agents for the firm’s owners is a classic example of the principal-agent relationship. In general, the firm’s owners are its investors, who
3. Some authors argue that in the 1980s, managers had weak monetary incentives that led to stagnant firm values. For example, Jensen (1986) argues that managers have access to free cash flow and face
2. In analyzing the relationship between capital structure and managerial incentives, studies employ substantially different settings. For example, Jensen and Meckling (1976) focus on the incentives
1. Modigliani and Miller (1958) illustrate that with perfect capital markets, capital structure is irrelevant for total firm value, so managers need not worry about the firm’s capital structure.
4. What potential reasons may explain the contradictory empirical results involving stock returns and leverage?
3. What is the empirical relationship between stock returns and leverage?
2. What are the differences between the trade-off and pecking order theories of capital structure?
1. Discuss MM Proposition II and its implications on stock returns.
4. Many empirical multifactor asset pricing models include financial leverage as an additional risk factor. Under what conditions would financial leverage be a priced risk factor? Discuss whether
3. Can financial constraints, defined as frictions that prevent the firm from funding all desired investments, ever be beneficial to the firm? If so, explain why.
2. A common argument against regulation is that unfettered competition always assures the most efficient outcome. Discuss whether this argument is valid in imperfect capital markets.
1. Many investors and lawmakers have blamed financial leverage for the economic crisis during 2008 and 2009. Discuss whether the academic literature supports this assertion.
4. How can capital structure choice modify the behavior of product market rivals due to predation strategy?
3. What is the role of product-market reputation on financing decisions?
2. According to the stakeholder theory of capital structure, would someone prefer to work for a high-debt or a low-debt firm? Explain why.
1. What firm-specific factors boost underinvestment and overinvestment problems in a company? In which case does the use of debt reduce opportunism?
4. What are the most important stylized facts derived from empirical studies that relate leverage and capital structure factors?
3. What are possible empirical measures for leverage, and what is the rationale for using either book or market leverage ratios?
2. What are the assumptions and predictions of the pecking order theory? Why do empirical studies generally find a negative abnormal stock return upon the announcement of an equity issue?
1. What are the assumptions and predictions of the trade-off theory? How can agency problems lead to a target leverage ratio?
Suppose a company purchases a $2,000,000 factory using $1,200,000 from a first mortgage finance company, $600,000 from a CDA loan.Suppose further that the business fails and the facility is sold
How does the subordinate mortgage financing available under the 504 Loan Program work? Suppose a company wants to purchase a property for $1.5 million, but the first mortgage company will only lend
How much of a $200,000 loan would be guaranteed? How much of a$2,000,000 loan would be guaranteed?
How much of a guarantee does a lender get under the SBA's 7(A)Loan Program? How much of a $100,000 loan would be guaranteed?
Name seven types of documents an SBA lender would expect if loan proceeds were to be used to purchase a company?
What considerations go into calculating the building's value as collateral?

Showing 1 - 100 of 435