3

Question 1

Advantages of management incentives

Answer 1

1. Increases compensation for managers due to increased R.O.E.
2. Makes in easier for companies to acquire new companies.
3. Pecking order. theory

Question 2

Advantages of reward effects

Answer 2

l. Higher leverage leads to a greater R. O. E.
2. Returns tend to increase with the level of debt
3. Leverage increases innovation of financial products

Question 3

3. Disadvantage of reward effects

Answer 3

1. Minority investors are compensated last in cases of default
2. The higher the default risk is the more expensive the financial products

Question 4

Other advantages of debt (6)

Answer 4

1. Debt leads to diversification
2. Constraint an equity leads to increased debt
3. Debt is an incentive for discipline management
4. Debt increases the heterogeneity of tax treatment
5. During inflation debt holders benefit by changing higher interest rates
   6.it increases the number of real estate borrowers

Question 5

Advantages of leverage mechanics (4)

Answer 5

1. allows first mover advantage leading to brand recognition for specifically listed R.E.
2. Increases returns of equity
3. Companies with significant leverage outperform companies with lower leverage
4. Tax benefit as interest earned on from debt is deductible on financial statements

Question 6

Name the 4 reasons debt financing in R. E transactions is used?

Answer 6

1. Leverage mechanics
2. Management incentives
3. Reward effects ( risk and return)
4. Formulation, / insurance / design of debt’

Question 7

Re transactions are using equity and debt what is equity?

Answer 7

Equity is cash or stocks or a combination of both

Question 8

What is positive and negative leverage

Answer 8

+ where leverage presence increases equity investor return,- where it decreases the equity investors return