c) Some economists argue that capital structure decisions are affected by the costs of financial distress that firms face. What are these costs exactly and why are they important to firms? Describe the different types of financial distress costs and explain how they may determine whether a firm raises equity or debt capital. In your answer, you should also refer to academic studies that provide estimates of the magnitude of distress costs. [Word limit: 350 words]

c) Some economists argue that capital structure decisions are affected by the costs of financial distress that firms face. What are these costs exactly and why are they important to firms? Describe the different types of financial distress costs and explain how they may determine whether a firm raises equity or debt capital. In your answer, you should also refer to academic studies that provide estimates of the magnitude of distress costs. [Word limit: 350 words]

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter9: The Basic Tools Of Finance

Section: Chapter Questions

Problem 6PA

See similar textbooks

Similar questions

3. Which of the following statements about the characteristics of debt and equities is true? C 1) They can both be long-term financial instruments. 2) Bond holders are residual claimants. 3) The income from bonds is typically more variable than that from equities 4) Bonds pay dividends. 5) They both involve a claim on the issuer's income 6) More than one answer is correct.
What's the taxable equivalent yield on a municipal bond with a yield to maturity of 3.5 percent for an investor in the 33 percent marginal tax bracket? (Round your answer to 2 decimal places.)
Firms A and B are identical except for their capital structure. A carries no debt, whereas B carries £60m of debt on which it pays a 5% interest rate. Assume no transaction costs, no taxes and risk-free debt. The relevant numbers are provided in the following table (in £ m): A B Value of Firm 100 120 Debt 0 60 Equity 100 60 Projected earnings before interest 12 12 Interest payment 0 3 Interest rate Not Applicable 5% Please answer the following questions a) "The situation described in the table is consistent with the absence of arbitrage opportunities". True or False (T/F)? b) Which one of the two firms is relatively overvalued (A/B)? c) "B's shares carry more risk than A's shares". True or False (T/F)? d) What is the return to an investor holding a 10% stake in B (in £ '000)? e) Consider an investor who wants to purchase a 20% stake in A. If he wished to replicate B's capital structure through homemade leverage,…
E3 The demand curve and supply curve for one-year discount bonds were estimated using the following equations: Bd Price=-2/5Quantity+990 Bs Price=Quantity+500 As the stock market continued to rise, the Federal Reserve felt the need to increase the interest rates. As a result, the new market interest rate increased to 19.65%, but the equilibrium quantity remained unchanged. What are the new demand and supply equations? Assume parallel shifts in the equations
The formula M(t) = 1.14t + 13.21 gives the approximate total revenue for a corporation, in billions of dollars, t years after 2000. The formula applies to the years 2000 through 2013. (a) Explain in practical terms the meaning of M(5). The expression M(5) is the total revenue for the corporation, in billions of dollars, in 2005.The expression M(5) is the year in which the corporation will earn 5 billion dollars. The expression M(5) is the total revenue for the corporation, in billions of dollars, in 2013.The expression M(5) is the year in which the corporation will earn 5 billion dollars more than it earned in 2000.The expression M(5) is the total revenue for the corporation, in billions of dollars, in 2000. (b) Use functional notation to express the total revenue for 2010. M (c) Calculate the total revenue in 2010. billion dollars
1.Which of the following companies will have the highest capacity for debt assuming all other factors are held equal: Company A with a steady customer base, and large amounts of fixed capital; Company B with a steady customer base and small amounts of fixed capital; Company C with seasonal customer base and large amounts of fixed capital; Company D with seasonal customer base and small amounts of fixed capital. ? Select a Choice Below current question choices OptionA Company A OptionB Company B OptionC Company C OptionD Company D
7-Suad decided to sell her stocks amounting to OMR 200,000 in the secondary market, as she received information that the current market price is higher. Which role of Financial Market is demonstrated in this situation? a.None of the options b.Price Discovery c.Information availability d.Both A and B 6-In which market is the financial instrument's value based on the value of an underlying asset? a.Derivative market b.Stock market c.Primary market d.Bond market 5-The difference between the deposit rate and the lending rate of a bank represents its: a.Profit b.Reserves c.Total income d.Total Expenditure
d)Assume that all the information given previously is the same and the defaultrisk premium for corporate bonds rated AAA is 1.5 percent, whereas it is4 percent for corporate bonds rated B. Compute the interest rates onAAA- and B-rated corporate bonds with maturities equal to one year, twoyears, three years, four years, five years, 10 years, 20 years, and 30 years.
15. Consider a government bond with a face value of $10 000, and a present value of $9500. If this bond is offered for sale at $9600, then the lack of demand for this bond will drive the price down until it reaches its equilibrium market price of $9500. individuals will purchase the bond at the offer price which will drive the market rate of interest down. the equilibrium market price of this bond has been achieved. the excess demand for the bond at $9600 will drive the price up to the face value of the bond. individuals will purchase the bond at the offer price which will drive the market rate of interest up
2... Intro to banking 2. Suppose you bought a condo for $200,000 financing it with a $40,000 down payment of your own funds and a $160,000 mortgage loan from a bank. (10 points) a. Assume that the market value of your condo has now risen to $240,000. Ignoring interest and other costs, and assuming the loan amount is still $160,000, calculate your rate of return on your asset (ROA) and your rate of return on your equity (ROE). b. Now assume that, instead of (a), you only put down $20,000 and borrowed $180,000 to buy the condo. Assuming that the market value of your house has risen to $240,000 and ignoring interest and other costs, calculate your rate of return on your asset (ROA) and your rate of return on your equity (ROE). c. Now, instead of (a) or (b), suppose the value of the condo fell from $200,000 to $150,000. Assuming you paid $200,000, financing it with $40,000 of your own money and $160,000 with a mortgage loan, and ignoring interest and other…
4 What is the economic advantage to a trade secret? Please explain why. Of the three valuation methods for an intangible asset discussed in the chapter, which one would you use and why? Regarding Stock Price, explain how it is set at the time of company formation. Describe the key factors that influence stock price before IPO. What is goodwill and how is it different from other intangible assets?
3-what are the factors influencing the development of accounting systems ?