Chapter 11 - Capital Structure Flashcards
1
Q
Pari-Passu
A
“on equal footing” in Latin
-Investors given equal priority
2
Q
“on equal footing” in Latin
-Investors given equal priority
A
Pari-Passu
3
Q
Primary Offerings
A
These are new shares sold to raise new capital
4
Q
Secondary Offerings
A
These are existing shares which are sold by current shareholders, thus closing their position in the company
5
Q
MM Prop I
A
The value of a firm is unaffected by its capital structure
6
Q
Perfect Capital Market satisfies
A
- ) Capital markets are perfectly competitive
- ) Capital markets are frictionless
- ) Financing and investment decisions are independent of each other
7
Q
MM Prop II
A
The cost of capital of a levered equity increases with the firm’s debt-to-equity ratio
8
Q
Estimating Debt Overhang
A
Equity Holders will benefit from a new investment requiring investment I only if:
[(NPV/I) > (BetaDebt / BetaEquity)]
