Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Question
Chapter 16.1, Problem 1CC
Summary Introduction
To discuss: The risk of bankruptcy that puts debt financing at a disadvantage with perfect capital market
Introduction:
A perfect capital market is a market where an investor has the power to change the price of an asset and all other investors have the right to access the same information. In this market, there is no arbitrage opportunity.
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Students have asked these similar questions
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
Why do most analysts recommend against having a capital structure of zero debt?
Which of the following statements is FALSE?
As debt increases, the risk associated with bankruptcy and agency costs is reduced.
Debt is often the least costly form of financing for a firm.
Firms should probably use some debt in their capital structure.
Different firms are subject to different levels of risk.
Chapter 16 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 16.1 - Prob. 1CCCh. 16.1 - Does the risk of default reduce the value of the...Ch. 16.2 - If a firm files for bankruptcy under Chapter 11 of...Ch. 16.2 - Why are the losses of debt holders whose claims...Ch. 16.3 - Prob. 1CCCh. 16.3 - True or False: If bankruptcy costs are only...Ch. 16.4 - Prob. 1CCCh. 16.4 - According to the trade-off theory, all else being...Ch. 16.5 - Prob. 1CCCh. 16.5 - Why would debt holders desire covenants that...
Ch. 16.6 - Prob. 1CCCh. 16.6 - Prob. 2CCCh. 16.7 - Coca-Cola Enterprises is almost 50% debt financed...Ch. 16.7 - Why would a firm with excessive leverage not...Ch. 16.7 - Describe how management entrenchment can affect...Ch. 16.8 - How does asymmetric information explain the...Ch. 16.8 - Prob. 2CCCh. 16.9 - Prob. 1CCCh. 16.9 - Prob. 2CCCh. 16 - Gladstone Corporation is about to launch a new...Ch. 16 - Baruk Industries has no cash and a debt obligation...Ch. 16 - When a firm defaults on its debt, debt holders...Ch. 16 - Prob. 4PCh. 16 - Prob. 5PCh. 16 - Suppose Tefco Corp. has a value of 100 million if...Ch. 16 - You have received two job offers. Firm A offers to...Ch. 16 - As in Problem 1, Gladstone Corporation is about to...Ch. 16 - Kohwe Corporation plans to issue equity to raise...Ch. 16 - Prob. 10PCh. 16 - Prob. 11PCh. 16 - Hawar International is a shipping firm with a...Ch. 16 - Your firm is considering issuing one-year debt,...Ch. 16 - Marpor Industries has no debt and expects to...Ch. 16 - Real estate purchases are often financed with at...Ch. 16 - On May 14, 2008, General Motors paid a dividend of...Ch. 16 - Prob. 17PCh. 16 - Consider a firm whose only asset is a plot of...Ch. 16 - Prob. 19PCh. 16 - Prob. 20PCh. 16 - Prob. 21PCh. 16 - Consider the setting of Problem 21 , and suppose...Ch. 16 - Consider the setting of Problems 21 and 22, and...Ch. 16 - You own your own firm, and you want to raise 30...Ch. 16 - Empire Industries forecasts net income this coming...Ch. 16 - Ralston Enterprises has assets that will have a...Ch. 16 - Prob. 27PCh. 16 - If it is managed efficiently, Remel Inc. will have...Ch. 16 - Which of the following industries have low optimal...Ch. 16 - According to the managerial entrenchment theory,...Ch. 16 - Info Systems Technology (IST) manufactures...Ch. 16 - Prob. 32PCh. 16 - Prob. 33P
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Similar questions
- What are the advantages and disadvantages ofusing short-term debt as a source of financing?arrow_forwardWhat is the biggest disadvantage to be considered when exploring the option of equity financing versus debt financing?arrow_forwardA. Briefly explain the problem of moral hazard in: (i) Equity financing (ii) Debt financingB. What is the adverse selection problem in financial markets and how can it be solved?arrow_forward
- Which of the following best describes the tradeoff managers face concerning the usage of debt? Answers: Lower taxes and lower risk of bankruptcy Lower taxes and higher risk of bankruptcy Higher taxes and lower risk of bankruptcy Higher taxes and higher risk of bankruptcyarrow_forward“Having zero debt in the firm’s capital structure is not an ideal scenario.” Do you agree withthis statement? Explainarrow_forwardThere are advantages and disadvantages of debt financing in contrast to equity financing. Which of the following is less likely to represent an advantage of debt financing? a. The cost of debt should be lower than the cost of equity for most companies due to the lower risk to the lender and the tax deductibility of interest b. The repayment of debt capital may affect the liquidity of the company c. If the return on assets exceeds the cost of debt, then this will result in a higher return on shareholders’ funds as compared to the return on assets d. The increase in borrowings will not normally affect the voting control of the current shareholders as compared to the issue of shares e. Fixed interest rate loans will result in the variability in the market value of such loans over time which will normally be less than the variability in the value of the equity of the companyarrow_forward
- Is this statement true or false? Please explain in detail As debt-financing is usually cheaper than equity financing, debt-financing will lower risk for transnational company.arrow_forward2. If a bank wants to avoid volatility in its regulatory capital, which investment classification would be the most desirable, and which investment classification would be the least desirable? Does your answer differ depending on whether the bank is large or small? In other words, do large and small banks differ on how they can categorize unrealized gains/losses on AFS debt?arrow_forwardWhy should an investor use debt?arrow_forward
- What is informal debt restructuring?arrow_forwardwhich of the following is not an advantage of equity rather than debt financing a. lower cost b. lower risk of insolvency c. lower funding risks d. no legal liability to pay dividends e. no requirement to repay capital.arrow_forwardHow does a firm's use of short-term debt as opposed to long-term debt subject the firm to a greater risk of illiquidity? Give tangible examplesarrow_forward
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