LT Lecture 5&6 - How much should a firm borrow?

Question 1

Theories guiding how much should a company borrow

Answer 1

Question 2

PV of tax shield

Answer 2

Question 3

Why don’t firms borrow more?

Answer 3

Question 4

Relative advantage of debt

Answer 4

Question 5

Use of different discount rates in valuation

Answer 5

Question 6

Proce that APV and after-tax WACC are equivalent

Answer 6

Question 7

Explain Bankruptcy cost

Answer 7

Question 8

Bankruptcy costs are paid by shareholders

Answer 8

Question 9

Why direct bankruptcy costs are small?

Answer 9

Question 10

Conflict between stakeholders

Answer 10

Question 11

2 Problems of debt

Answer 11

Question 12

Risk shifting

Answer 12

Question 13

Debt Overhang

Answer 13

Question 14

Costs of financial distress

Answer 14

Question 15

Trade-off theory

Answer 15

Question 16

Present Value of Cost of Financial Distress

Answer 16

Question 17

**Trade-off Theory Graph

Formula of “Value of the company”

Answer 17

Question 18

Trade-off Theory in Reality:

What happens when

1) Issue equity to retire debt?
2) Issue debt to retire equity?

Answer 18

Question 19

Pecking order theory: signalling

Answer 19

Question 20

Pecking order theory: signally - Overview

Answer 20

Question 21

Pecking order theory: information asymmetry - Summary

Answer 21

Question 22

Solution of information asymmetry

Answer 22

Question 23

**Pecking Order Theory

Answer 23

Question 24

Agency Problem

Answer 24

Question 25

Benefits of public cooperation

Answer 25

Question 26

Agency Program solution

Answer 26

Question 27

Free Cash Flow Problem

Answer 27

Question 28

Solution to Free Cash Flow Problem

Answer 28

Question 29

3 Theories of capital structure

Answer 29