Article - Myers and Majluf Topic 9

Question 1

what do Myers and Majluf (1984) say about FCF?

Answer 1

FCF is beneficial because managers (loyal to existing shareholders) have information the market does not have

The financial slack provided by large amount of FCF prevents this socially and privately undesirable outcome.

Question 2

which type of financing is better? less risky?

Answer 2

bond market financing better than equity market financing

Question 3

if low risk financing is unavailable what should managers do?

Answer 3

• pass up pos NPV projects

- use financial slack provided by FCF

Question 4

when should new stocks be issued?

Answer 4

when they reflect the firms value of assets and managers superior information

Question 5

when is a merger of a slack rich and slack poor firm optimal and will increase value of combined firms?

Answer 5

when the slack poor firm can convey their special information to prospective buyer.