Capital Structure

Question 1

Examples of what will affect the Capital structure (2 which affects and 2 which does not)

Answer 1

AFFECT
Acquisition of a major competitor
Substantial increase in share prices

DO NOT AFFECT
Payment of a stock dividend - NO!!

Question 2

Modigliani and Millers prop I is…

Answer 2

In perfect makets,
Level of debt has no effect on company value

Question 3

Miller and Modigliani Prop II

Answer 3

Cost of equity UP with
Use of debt in capital structure

Question 4

Agency costs is:

Answer 4

Conflict between management and owners

Question 5

Management is generally focused on

Answer 5

Maximizing value of equity

Question 6

Well designed compensation scheme should eliminate agency costs?

Answer 6

No.
Should reduce

Question 7

Financial metrics that can be used to assess debt (3)

Answer 7

1. Leverage ratios and coverage ratios
2. Debt / ebitda
3. Ebit/ interest expense

Question 8

Why exist differences between
Target Capital structure
Capital structure

Answer 8

Companies tend to raise capital when is needed

Invest when market pricing are favorable

Question 9

Pecking order

Answer 9

Internally funds > new debt > new equity