Questions from Corporate Finance

Q: The trade-off theory relies on the threat of financial distress

The trade-off theory relies on the threat of financial distress. But why should a public corporation ever have to land in financial distress? According to the theory, the firm should operate at the to...

Q: Why does asymmetric information push companies to raise external funds by borrowing

Why does asymmetric information push companies to raise external funds by borrowing rather than by issuing common stock?

Q: Compute the present value of interest tax shields generated by these three

Compute the present value of interest tax shields generated by these three debt issues. Consider corporate taxes only. The marginal tax rate is Tc = .35. a. A $1,000, one-year loan at 8%. b. A five-ye...

Q: Suppose that Congress sets the top personal tax rate on interest and

Suppose that Congress sets the top personal tax rate on interest and dividends at 35% and the top rate on realized capital gains at 15%. The corporate tax rate stays at 35%. Compute the difference bet...

Q: “The trouble with MM’s argument is that it ignores the fact

“The trouble with MM’s argument is that it ignores the fact that individuals cannot deduct interest for personal income tax.” Show why this is not an objection if personal tax rates on interest and eq...

Q: Look back at the Johnson & Johnson example in Section 18-

Look back at the Johnson & Johnson example in Section 18-1. Suppose Johnson & Johnson increases its long-term debt to $30 billion. It uses the additional debt to repurchase shares. Reconstruct...

Q: In Section 18-3, we briefly referred to three games

In Section 18-3, we briefly referred to three games: playing for time, cash in and run, and bait and switch. For each game, construct a simple numerical example (like the example for the risk-shifting...

Q: Let us go back to Circular File’s market value balance sheet:

Let us go back to Circular File’s market value balance sheet:
Who gains and who loses from the following maneuvers? a. Circular scrapes up $5 in cash and pays a cash dividend. b. Circular halts ope...

Q: Reevaluate the NPV of the proposed polyzone project under each of the

Reevaluate the NPV of the proposed polyzone project under each of the following assumptions. What’s the right management decision in each case? a. Spread in year 4 holds at $1.20 per pound. b. The U.S...

Q: a. Who benefits from the fine print in bond contracts when

a. Who benefits from the fine print in bond contracts when the firm gets into financial trouble? Give a one-sentence answer. b. Who benefits from the fine print when the bonds are issued? Suppose the...