Fundamentals of Corporate Finance

Chapter 16 Debt Policy. Homework.

1 Define capital structure.

2 Define restructuring.

3) Explain Modigiliani and Miller's Proposition I.

4) What is the difference in operating risk and financial risk?

5) Debt financing affects only one risk component. Name the risk?

6) Another name for business risk is ________________.

7) Taking on more debt causes what reaction from shareholders?

8) What is an interest rate shield?

9) Explain Modigiliani and Miller's Proposition II.

10) Define the trade-off theory.

11) Describe the role of bankruptcy as it relates to the trade-off theory.

12) What increases the odds of financial distress?

13) What are the direct and indirect costs associated with bankruptcy?

14) Provide an example of the management of a company going after a risky project

15) Why would stockholders refuse to contribute more equity capital even if a project has positive NPV?.

16) Explain the pecking order theory. Rank the three forms of funding?