Cooper Corporation's management currently owns 1 per cent of the firm's outstanding shares. The firm is currently financed with 50 per cent debt and 50 per cent equity, but it is planning to increase its leverage ratio to 80 per cent debt by borrowing and using the funds to repurchase shares. Management has decided not to participate in the repurchase, so their percentage ownership of the firm will increase. Explain briefly how managers' investment incentives are likely to change after the recapitalization. Specifically, discuss their incentives to take:

a) negative-NPV projects that benefit them personally

b) risky projects

c) long-term projects that take more than 10 years to provide an adequate return to capital.

Answer rating: 100% (QA)

How Managers Investment Incentives Change After Recapitalization After the proposed recapitalization where Cooper Corporation increases its leverage r... View the full answer