Describe how managers whose firms have debt outstanding and face financial distress could jeopardize the investments of creditors with the “games” of asset substitution and under-investment.
Answer to relevant QuestionsDifferentiate between direct and indirect costs of bankruptcy. Which of the two is generally more significant? How influential are corporate and personal taxes on capital structure? Historically, have changes in American tax rates greatly affected debt ratios? A firm operates in perfect capital markets. The required return on its outstanding debt is 6 percent, the required return on its shares is 14 percent, and its WACC is 10 percent. What is the firm’s debt-to-equity ratio? You are the manager of a financially distressed corporation with $1.5 million in debt outstanding that will mature in three months. Your firm currently has $1 million cash on hand. Assume that you are offered the opportunity ...List and briefly discuss the key features that distinguish long-term debt issues from each other.
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