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Please provide answers to the following questions related to the capital structure of firms: Briefly contrast agency problems of equity to the agency problem of
Please provide answers to the following questions related to the capital structure of firms:
- Briefly contrast agency problems of equity to the agency problem of debt. In this context, explain two strategies that benefit shareholders and harm debtholders.
- In reality, direct and indirect bankruptcy costs and other costs of financial distress are incurred when businesses approach bankruptcy. Explain why (and how) these costs matter for capital structure optimality. What are the effects that are balanced (or traded off against each other) in the balancing (or trade-off) theory of capital structure (i.e., what factors does the capital structure depend on in most of the world, where corporate taxes are charged, and bankruptcy is possible)?
- Please provide two examples of real (exchange-traded) companies with different capital structures (i.e., different D/E ratios) and explain how their capital structure decisions can be explained by the balancing (or trade-off) theory of capital structure. In your answer, also quantify the D/E ratios of the companies you use as examples.
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