Incentive conflicts between equity and debt holders

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What is the trade off theory and how can it be used to choose an optimal capital structure?

What M&M assumption allows us to not consider incentive conflicts between equity and debtholders in choosing investment and payout decisions?

What are the three common types of conflicts between debt and equity and how do they affect firm value? Does “cashing out” always affect firm value?

Why is the payout to equity convex when the firm uses leverage? Why is the payout to debt concave? How does leverage affect the equityholder’s incentive to take on risk? Why? How does debt respond to these incentives when determining the interest rate to charge?

Why might equity want to pay a dividend, which results in unlevering, even when they are near bankruptcy?

Reference no: EM131932633

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