Reference no: EM131903223
1. Explain the two Irrelevance Propositions advanced by Modigliani and Miller (M&M) in 1958. Give an intuitive argument for why these propositions are plausible.
In contrast to the position of M&M, what is an Optimal Capital Structure?
Describe the Static Trade-Off Theory that resulted from a synthesis of the work of M&M and their critics, carefully explain the elements that are being weighed in the decision.
2. What happens to a firm in Chapter 7 Bankruptcy? Describe the Absolute Priority Rule followed in Chapter 7 Bankruptcy. Broadly, describe the process for a Chapter 11 Bankruptcy. What is a Prepackaged Bankruptcy?
3. Jensen and Meckling (1976) also provide potentially important insights into the choice of Capital Structure.
They discuss Agency Conflicts and the Costs associated with these them. Describe the Agency Conflicts between Corporate Managers and the Stockholders of the firm. Next, describe the Agency Conflicts between the Bondholders and Stockholders of a firm.
Be sure to describe how the level of debt in capital structure will affect both types of agency conflicts. Explain likely differences in preferences about Payout Policies between the manager, the stockholders, and the bondholders.
Describe how the trade-offs between the different classes of Agency Conflicts and Costs may produce an Optimal Capital Structure in the context of Jensen and Mecklings' framework.
4. In his Pecking Order Theory, Stewart Myers argues that managers should consider the "cost" of obtaining various types of external financing in selecting a capital structure. What exactly is the "cost" that they should consider and why this is the relevant concern?
Roughly, describe the magnitudes of these costs associated with the issue of various types of securities.
When there are informational inefficiencies in markets, Myers also argues that corporate actions send important signals to market participants.
Describe the signals that stock issues and bond issues might send to markets about the firms' prospects.
Correspondingly, how do markets react to announcements of these two types of security issues?