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Lecture 3- Gearing (part 2)
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1Financial distress- When firm experiences [blank_start]significant problem[blank_end] in meeting its [blank_start]debt obligations[blank_end]
- Asignificant problem
- Bdebt obligations
2Bankruptcy- Economically a firm goes [blank_start]bankrupt[blank_end] when [blank_start]value[blank_end] of its [blank_start]assets[blank_end] [blank_start]equal[blank_end] to its [blank_start]debt[blank_end] therefore, [blank_start]equity[blank_end] has no value
- Abankrupt
- Bvalue
- Cassets
- Dequal
- Edebt
- Fequity
3Direct bankruptcy costs- [blank_start]Costs[blank_end] that are [blank_start]directly associated[blank_end] with [blank_start]bankruptcy[blank_end], such as [blank_start]legal[blank_end] and [blank_start]administrative[blank_end] expenses
- ACosts
- Bdirectly associated
- Cbankruptcy
- Dlegal
- Eadministrative
4Indirect bankruptcy costs- [blank_start]Costs[blank_end] of avoiding [blank_start]bankruptcy filing[blank_end] incurred by [blank_start]financially distressed[blank_end] firm
- ACosts
- Bbankruptcy filing
- Cfinancially distressed
5Financial distress costs- [blank_start]Direct[blank_end] & [blank_start]indirect[blank_end] costs associated with going [blank_start]bankrupt[blank_end] or experiencing [blank_start]financial distress[blank_end]
- ADirect
- Bindirect
- Cbankrupt
- Dfinancial distress
6One type of indirect cost of financial distress is [blank_start]impaired ability[blank_end] to [blank_start]conduct business[blank_end]. Business not able to [blank_start]continue[blank_end] their [blank_start]operations[blank_end] with [blank_start]same[blank_end] condition as before. Suppliers & customers [blank_start]reluctant[blank_end] to do business
- Aimpaired ability
- Bconduct business
- Ccontinue
- Doperations
- Esame
- Freluctant
7Another type of indirect cost of financial distress is [blank_start]agency cost[blank_end] ([blank_start]conflict[blank_end] of [blank_start]interest[blank_end] between [blank_start]bondholders[blank_end] & [blank_start]shareholders[blank_end])
- Aagency cost
- Bconflict
- Cinterest
- Dbondholders
- Eshareholders
8One type of agency cost is [blank_start]incentive[blank_end] to [blank_start]underinvestment[blank_end]. Company [blank_start]under invests[blank_end] on [blank_start]positive NPV projects[blank_end] when experiencing financial distress & when [blank_start]shareholders[blank_end] perceive these [blank_start]projects[blank_end] to benefit [blank_start]bondholders[blank_end] rather than them
- Aincentive
- Bunderinvestment
- Cunder invests
- Dpositive NPV projects
- Eshareholders
- Fprojects
- Gbondholders
9Another type of agency cost is [blank_start]incentive[blank_end] to take [blank_start]large risks[blank_end]
- Aincentive
- Blarge risks
10Third type of agency cost is [blank_start]milking[blank_end] the [blank_start]property[blank_end]. Managers & shareholders decide to [blank_start]pay extra dividends[blank_end] or other distributions in times of [blank_start]financial distress[blank_end], leaving [blank_start]less[blank_end] in firm for [blank_start]bondholders[blank_end]
- Amilking
- Bproperty
- Cpay extra dividends
- Dfinancial distress
- Eless
- Fbondholders
11Covenant- [blank_start]Legal agreement[blank_end] between [blank_start]lender[blank_end] & [blank_start]borrower[blank_end] to protect [blank_start]borrower[blank_end]
- ALegal agreement
- Blender
- Cborrower
- Dborrower
12Static theory of capital structure- Firm [blank_start]borrows[blank_end] up to point where [blank_start]tax benefit[blank_end] from an extra pound or euro in [blank_start]debt[blank_end] is [blank_start]exactly equal[blank_end] to [blank_start]cost[blank_end] that comes from [blank_start]increased probability[blank_end] of financial distress
- Aborrows
- Btax benefit
- Cdebt
- Dexactly equal
- Ecost
- Fincreased probability
13Pecking order theory- Firm must first use [blank_start]internal financing[blank_end] to [blank_start]fund[blank_end] an [blank_start]investment[blank_end]. If this [blank_start]internal financing[blank_end] isn't enough they should [blank_start]issue debt[blank_end] because it's cheaper form of [blank_start]funding[blank_end] & creates [blank_start]tax shield[blank_end]. Finally, [blank_start]issue equity[blank_end] as last resort
- Ainternal financing
- Bfund
- Cinvestment
- Dinternal financing
- Eissue debt
- Ffunding
- Gtax shield
- Hissue equity
14In market timing theory managers [blank_start]issue equity[blank_end] when its [blank_start]market value[blank_end] is high relative to [blank_start]book values[blank_end] & [blank_start]issue debt[blank_end] when [blank_start]market value[blank_end] of equity is low relative to its [blank_start]book values[blank_end]
- Aissue equity
- Bmarket value
- Cbook values
- Dissue debt
- Emarket value
- Fbook values
15Liquidation- [blank_start]Termination[blank_end] of firm as a [blank_start]going concern[blank_end]
- ATermination
- Bgoing concern
16Reorganisation- [blank_start]Financial restructuring[blank_end] of [blank_start]failing[blank_end] firm to attempt to [blank_start]continue operations[blank_end] as a [blank_start]going concern[blank_end]
- AFinancial restructuring
- Bfailing
- Ccontinue operations
- Dgoing concern
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- User has deleted their subject information Quiz on Lecture 3- Gearing (part 2), created by Deleted user on 12/07/2021.
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- Created on 12 Jul 2021 · updated on 12 Jul 2021
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