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- The pecking order states that firms should: Group of answer choices issue debt first. use internal financing first. always issue debt then the market won't know when management thinks the security is overvalued. issue new equity first.Adverse selection is a problem associated with equity and debt contracts arising from the lender's relative lack of information about the borrower's potential returns and risks of his investment activities. the lender's inability to legally require sufficient collateral to cover a 100 percent loss if the borrower defaults. the borrower's lack of incentive to seek a loan for highly risky investments. 4. none of the choices.Under Modigliani and Miller's assumption of perfect capital markets, which of the following is NOT CORRECT? A) The proper WACC equation under perfect capital markets is the "pre-tax" WACC B) Taxes are irrelevant C) Reducing the debt ratio can cause the cost of debt and the cost of equity to decline, even as the WACC stays the same. D) The WACC does not change as the weights of debt and equity change E) Bankruptcy costs reduce the amount bondholders receive when bankruptcy occurs
- An investor that owns convertible bonds in a deteriorating company would realize a higher return on his/her investment by converting the bond immediately before bankruptcy. True or False.In the conflicts between equity holders and bond holders, 1).Why would equity investors want to forego good project with positive NPV (“debt overhang”) and rather take risky projects with negative NPV? (“risk shifting”) 2).What is an example of “asset stripping” from equity holders in case of high financial distress?An investment vehicle, the investee, is created and financed with a debt instrument held by a debt investor and equity instruments held by some other investors. The equity tranche is designed to absorb the first losses and to receive any residual return from the investee. One of the equity investors who hold 30% of the equity is also the asset The investee uses its proceeds to purchase a portfolio of financial assets; thus, exposing them to the credit risk associated with the possible default of principal and interest payments of the assets. The transaction is marketed to the debt investor as an investment. Such investment has minimal exposure to the credit risk associated with the possible default of the assets in the portfolio. It is because of the nature of the assets and of the equity tranche. The returns of the investee are significantly affected by the management of the investee’s asset portfolio. Managing the asset portfolio includes decisions about the selection,…
- Select all that are true with respect to the cost of debt. Group of answer choices it is the return the firm needs to earn overall to satisfy all investors It is the rate the debt holders demand given the risk they face as debt holders Can be estimated using CAPM Cannot be estimated using CAPM because CAPM is used for estimating the cost of equity Is always equal to the YTM on a company's existing bonds Is lower than the YTM on a company's existing debt if there is default risk Can be proxied by the YTM on a company's existing debt if the debt is risk free Flag question: Question 7Choose option a,b,c,d,e for the following: Question 6 - A higher financial risk: a. Arises when the debt – equity ratio is reduced. b. Can avert financial distress. c. Will cause the shareholders to expect lesser return. d. Indicates an inefficient use of fixed cost assets. e. Indicates an inefficient use of fixed cost funds.Please explain if a company has already taken too much debt (exceeded the amount that they can borrow) but has strong equity value, can this company be a leverage buyout (LBO) target? Please reply. Thanks.
- Creditors look for Select one: a. Net working capital for their safety b. Balance net working capital for their safety c. None of the options d. High net working capital for their safety e. Less net working capital for their safetyAn investment vehicle, the investee, is created and financed with a debt instrument held by a debt investor and equity instruments held by some other investors. The equity tranche is designed to absorb the first losses and to receive any residual return from the investee. One of the equity investors who hold 30% ofthe equity is also the asset manager. The investee uses its proceeds to purchase a portfolio of financial assets; thus, exposing them to the credit risk associated with the possible default of principal and interest payments of the assets. The transaction is marketed to the debt investor as an investment. Such investment has minimal exposure to the credit risk associated with the possible default of the assets in the portfolio. It is because of the nature of the assets and of the equity tranche.The returns of the investee are significantly affected by the management of the investee’s asset portfolio. Managing the asset portfolio includes decisions about the selection,…Firms are required to recognize changes in the value of short-term marketable equity investments before investments are sold. True False Fast answer with explanation