The Salad Oil Storage (SOS) Company has financed a large part of its facilities with long-term debt.
Question:
The Salad Oil Storage (SOS) Company has financed a large part of its facilities with long-term debt. There is a significant risk of default, but the company is not on the ropes yet. Explain:
(a) Why SOS stockholders could lose by investing in a positive-NPV project financed by an equity issue.
(b) Why SOS stockholders could gain by investing in a negative-NPV project financed by cash.
(c) Why SOS stockholders could gain from paying out a large cash dividend. How might the firm’s adherence to a target debt ratio mitigate some or all of the problems noted above?
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a SOS stockholders could lose if they invest in the positive NPV project and then SOS beco...View the full answer
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Related Book For 
Principles of Corporate Finance
ISBN: 978-0072869460
7th edition
Authors: Richard A. Brealey, Stewart C. Myers
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