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Question:
a. Explain what the debt overhang problem is (following the lines of Myers 1977) make sure that you specify what the relevant conflict of interest is and what are the key necessary conditions for this problem to happen?
b. Explain the "asset substitution" effect. Again make sure that you clarify which agents are in conflict and the necessary conditions for the problem to happen.
The risk free rate is 10 percent and the expected return on the market portfolio is 14 percent. A firm considers a project that is expected to have a beta of 1.3, whereas the beta
Explain the factors affecting the choice of a maximum cash balance amount. The maximum cash balance amount is regulated by available investment opportunities, the expected payb
If normal operating revenues are inadequate to repay the debt, liquidation of collateral may be necessary. Corporate bonds can be either secured or unsecured by c
The salem company bond currently sells for $955 has a 12% coupon interest rate and $ 1000 par value pays interest annually an
Ratios A great number of ratios might be appropriate for this purpose depending on the specific kind of financial performance which is being compared. Amongst those appropriate
Savings and loan associations Historically savings along with loan associations (S&Ls) and thrift institutions have concentrated mostly on residential mortgages by acquiring fu
Mistakes in Linton's evaluation (1) The preliminary investment in working capital should be offset by a working capital release in the final year, assuming a constant level of
Determine the Types of users Investors -look at the risk of their investment, future growth and profitability. Managers / employees-have access to more information and will want
the approach focussed mainly on the financial problems of a corporate enterprise
What is Business risk It is related to response of the firm's earnings before taxes andinterest, or operating profits, to changes in sales. When cost of capital is used to eval
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