CHAPTER 17 CAPITAL STRUCTURE: LIMITS TO THE USE OF DEBT 2. The statement is incorrect. If a firm has debt, it might be advantageous to stockholders for the firm to undertake risky projects, even those with negative net present values. This incentive results from the fact that most of the risk of failure is borne by bondholders. Therefore, value is transferred from the bondholders to the shareholders by undertaking risky projects, even if the projects have negative NPVs.
e. Although its stockholders are insulated by limited legal liability, the corporation's legal status does not protect the firm's managers in the same way; i.e., bondholders can sue its managers if the firm defaults on its debt, even if the default is the result of poor economic conditions. 3. Which of the following statements is CORRECT? a. In a regular partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business.
They worked with the RIAs (registered investment advisors) to lower the cost. They ruled out those that did not match the efficient market theory, avoiding purchase stocks in the open market (use block trade) or near announcement date. These are the two examples of avoiding big price changes caused by large purchase or event risk. 2. DFA roughly believed in efficient market theory.
Loosening of Credit Proponents of negative interest rates suggest that when financial intermediaries choose between paying for deposits and receiving income from loans, they will choose the latter. In turn, businesses benefit from this greater amount of credit. Japanisation of the Eurozone However, we mustn’t lose sight of why this proposal is being mooted – to stave off the Eurozone’s deflationary issue. As such, will negative interest rates stem the tide? The answer to this question is simply not clear, but it primarily depends upon expectations of future inflation.
In my opinion deprivatization will slow down potential growth of the country since short-term and long-term investments will be affected by the uncertainty of property rights security. Less corporations and foreign investors will take the risk of investing and not getting their return. It also might affect the quality of goods and services since there may be less competition and investments in technology. 4) Who gains from deprivatization? Who loses?
This stands in sharp contrast to the early view of Miller and Modigliani (1958), who argued that in a well-functioning efficient market without taxes, informational asymmetries, and default costs no financial synergy can be found because the market value of company does not depend on its capital structure. However, a firm’s capital structure decision can matter if these assumptions are not true. The theory has two important caveats concerning its applicability; first, one of the merging firms must be experiencing financial distress. The theory is most directly applicable to marginally profitable start-up companies and existing companies that are financially distressed. Second, theory only applies when severe agency problems exist between the manager and the claim holders of the distressed firm.
In fed we trust book report essay In Fed We Trust, by David Wessel, goes over the hard decisions and the order of events that caused the Great Panic. To prevent a possible second Great Depression, Ben Bernanke, a scholar of the Great Depression was called in to save the day. Bernanke swore to do everything in his power to keep the economy afloat, which entitled keeping the big businesses from going under. Some of the key players in this book were Henry Paulson, who was the Secretary of Treasury under the Bush Administration, previously stated Ben Bernanke and his other colleagues who were Don Kohn, Tim Geithner, and Kevin Warsh. These last stated four men were also known as the "four musketeers."
The fed has to set a lower reserve requirement, which allows banks to loan out more money, which generates more interest, which could lead to periods of inflation and could have worse consequences if the government does not react quickly enough. Inflation would decrease the purchasing power of an individual's money, which would lead to more saving and less spending. (Fried) Less spending would mean less money being injected into the circular flow of our economy and would lead to economic crisis. However, many critics also use this to determine how national debt does not have a huge impact on the economy. A huge national debt has no effect on the money market.
This meant that the risk was issued at investment grade but now was not backed by valuable assets of the companies which were to be spun off to MI which was to be backed by equity. The value of the bonds would decline substantially and the bond holders would loose a lot of their investment. c) Management(The Mariott brothers) The management gains from the spin off since it is able to split its distressed assets from the profit driving assets and there was a new company which was not under distress thus helping them retain their management positions and start from scratch. They can concentrate on core businesses thus improving efficiency and value. d) The value of the
Likewise, in the case of bad or doubtful debts, an estimate for provision is usually done to know as to how much of the trade receivables the company might not be receiving. This provision is created to safeguard the company from the losses from debts. Given these points, estimation appears to be beneficial. However, “estimates are inherently subjective and therefore lack precision as they involve the use of management's foresight in determining values included in the financial statements” (Accounting-simplified.com, 2013). They can sometimes downsize the dependability on the