L4: Debt and Incentives Flashcards

1
Q

Agency costs

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2
Q

Example where use of leverage creates a conflict btw S/H and D/H

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3
Q

“Games” played by shareholders at the expense of creditor
Suppose a levered firm is choosing between two projects with equal NPV, one of which is riskier than the other. Are equity- and debt-holders indifferent between the two?

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4
Q

“Games” played by shareholders at the expense of creditor
Suppose a levered firm is choosing between two projects with equal NPV, one of which is riskier than the other. Are equity- and debt-holders indifferent between the two?
- Consequences

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5
Q

Where do conflicts of interest btw D/H and S/H arise?

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6
Q

Who pays for risk-shifting behaviour?

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7
Q

Do we see the risk-shifting behaviour in practice?

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8
Q

Why can’t we avoid costs of financial distress by renegotiating with creditors?

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9
Q

Do we observe the debt-overhand problem in reality?

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10
Q

What are the implications from the agency conflicts?

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11
Q

Mitigating Asset Substitution

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12
Q

Leverage and Managers - Shareholder conflicts

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13
Q

Debt and Incentives to maximize NPV

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14
Q

JensenandMeckling (1976)

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15
Q

JensenandMeckling (1976): Assumptions

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16
Q

“Effort” Is a Metaphor

17
Q

Private benefits examples

18
Q

MM and moral hazard

19
Q

Investor break-even conditions

20
Q

Optimality of debt

21
Q

How to figure out if its best to finance the project with debt or equity

22
Q

How to handel managerial finance problem?

23
Q

Agency costs

24
Q

Limitations of risk shifting potential

25
How can this risk shifting behaviour be mitigated?
26
Advantage of debt
27
Effort problem by Jensen&Meckling
28
Further applications Jensen & Meckling
Model can also be applied to: - any internal E/H, even if they are only part of the firm (provides effort and at the same time ownes a fraction of the firm)
29
When is the Jensen & Meckling model applied?
30
Leveraged recapitalization
Issue debt to repurchase shares
31
FCF and incentive benefits of debt
32
For whom is the agency cost of debt more important?
33
Taking into account the additional benefit of leverage: “Augmented” trade-off model
34
Practical implications