Capital Structure And Corporate Financing Decisions Theory Evidence And Practice 1st Edition H. Kent Baker, Gerald S. Martin - Solutions

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Why may smaller firms use PB initially to evaluate projects and then use more sophisticated evaluation techniques as the firm grows in size?
How do different depreciation schedules (accelerated versus straight-line) affect EVA?
If debt funding is unavailable for a project, is there a difference between CFA and FCF and between P-TWACC and A-TWACC?
Discuss the issue of an FCF being an all-equity version of CFA regarding the scale of the project when debt is unavailable for funding a project.
Why is the constant discount rate used in the textbook version of NPV similar to the yield to maturity measure for a bond?
Why is using CFA with A-TWACC considered double counting the tax benefit of debt?
Assuming that the book value of equity and debt are the same as their market values (V = E + D) in Equations 4.11 through 4.14, demonstrate that FCF /(1 + A-TWACC) equals CFA / (1 + P-TWACC).
Does the presence of large shareholders attenuate investment inefficiencies?
Are boards of directors typically effective in reducing investment distortions?Why or why not?
Why do some managers follow other managers in their investment decisions, a behavior known as herding?
Why do some managers prefer to invest in projects with short-term performance?
Why do some authors view investment cash flow sensitivity as a symptom of underinvestment while others see it as a symptom of overinvestment?
How does competition among different standards or platforms affect corporate decisions?
Explain the differences between the “resource-based view of the firm” and the view of the firm as a “nexus of contracts.” What are the practical implications of these views? Are the two views compatible?
The efficient internal capital markets theory such as that of Stein (1997) holds that conglomerate headquarters may add value by allocating funds for investment across divisions more efficiently than would the market in case all divisions were stand-alone units. Explain the logic of this argument.
The industry life cycle is not a given; it is affected by the strategic decisions made by the firms in the industry. Give one or more examples of strategic decisions that can affect the dynamics of an industry. Explain how those strategic issues can be taken into account when valuing new
3. Does the current capital structure influence who is in a position to be the bidder or who becomes the target in an M&A?
2. Which combination of the method of payment and the source of financing prevails empirically, and what is the reasoning for this observation?
1. What are the main motives for payments with stock or cash in corporate takeovers?
4. Why does an issuer’s stock price typically drop following the announcement of a PIPE financing?
3. Why do PIPE shares sell at a discount?
2. At whose expense are hedge funds profiting through PIPE deals?
1. What benefits does a PIPE offering provide an issuer over a traditional private placement?
4. What are the strengths and weaknesses of the different nontax models in explaining the empirical data on leasing?
3. What are the strengths and weaknesses of the tax-based models in explaining leasing?
2. What are the arguments for and against treating leases as a substitute for debt?
1. What are the unique features of lease contracts as described in Smith and Wakeman (1985), Schallheim (1994), Eisfeldt and Rampini (2009), and Gavazza (2010)?
4. How can the differing cases on fiduciary duties be reconciled?
3. What economic principles can be used to disperse the fear that shareholders may use debt for opportunistic behavior?
2. What is the fear courts have regarding the relationship among directors, shareholders, and creditors?
1. What is the economic justification for fiduciary duties if the parties can freely contract?
4. Explain the impact of “too big to fail” and similar bailout policies on the optimal capital structure, ex-ante.
3. Explain the importance of considering the financial risk of rivals, customers, suppliers, and other counter-parties. What evidence suggests these considerations are material?
2. Explain the conflicts of interest among stakeholders in a financially distressed firm and how these conflicts potentially destroy firm value.
1. Why has Chapter 11 historically been characterized as “prodebtor”? How might the amendments to the U.S. Bankruptcy Code in 2005 alter this characterization?
4. Empirical evidence shows an abnormally positive and statistically significant return for lessee firms that announce an SLB but not a significant return for the lessor. What explains this difference?
3. Are SLB transactions likely to increase or decrease during a recession? Why?
2. Some dismiss earnings management and manipulation of financial ratios as dubious motives for SLB transactions. Why might a financial manager still choose to use them for these reasons?
1. Consider a firm that purchased its headquarters with a low interest rate mortgage loan. Why might the firm want to sell the building and lease it back, even if the implied rate of interest on the lease is greater than the current mortgage rate of interest?
4. How does evidence from bankruptcies support using secured debt to improve monitoring and efficient liquidation?
3. How strong is the evidence supporting the use of secured debt to signal borrower quality?
2. What is the link between bank debt and secured debt?
1. What is secured debt?
4. Explain whether competition in ratings should be encouraged or discouraged?
3. Do the various regulatory uses of credit ratings make sense? Why or why not?
2. In what ways do users rely on credit ratings? Should their reliance be reduced?Why or why not?
1. Given that future events are inherently difficult to predict, and that the ways in which predictions can fail also are unpredictable, is speaking of the quality of credit ratings and of the reputation of a credit rating agency meaningful?Explain.
4. When a loan market becomes more competitive due to the entry of new banks headquartered in other markets, how does this affect the use of collateral?
3. Bankers and bond rating agencies state that when a borrower pledges collateral, the result is lower risk on a loan. Empirical research documents that, on average, secured loans carry higher yield spreads than do unsecured loans. Explain the rationale for the belief of bankers and rating
2. The empirical evidence is mixed as to whether the relationship between loan maturity and rate spreads is positive or negative. What explanations exist for either finding?
1. Both benefits and costs are associated with forming bank relationships. How can a bank relationship prove costly to the bank? How can it prove costly to the borrower?
4. Why might relationships between banks and firms push the government to protect banks from failure in times of economic uncertainty?
3. Following the collapse of much of the banking sector in 1933, the Glass–Steagall Act separated banks based on their types of business. Why might price stabilization contribute to financial crises?
2. How could conflicts of interest in universal banking lead to reduced costs of borrowing for firms? What evidence is against this particular conflict of interest?
1. Rajan (1992) trades off the monitoring benefits of banking relationships against the hold-up costs. Suppose a firm borrows to pay off a bank loan. Is this good news or bad news for shareholders? Why?
3. Fan and So (2004) use surveys as a tool to measure changes in managers’ beliefs about capital structure. Describe the study of Fan and So (2004) and discuss why managers may have changed their opinions from 1994 to 1999.
2. Titman (1984) argues that the liquidation of a firm may impose costs on both customers and employees. As a result, they demand risk premiums on products and wages when leverage increases. These costs are transferred to the shareholders.However, if the shareholders commit to liquidate only when
1. What are the strengths and weaknesses of survey research when compared to other empirical research methods in the corporate finance literature?
4. Briefly discuss the survey evidence on market timing in financing decisions. Is survey evidence consistent with findings in empirical studies?
3. Does a country’s institutional and legal system play a major role in corporate financing decisions? If so, how?
2. Survey evidence shows striking differences in the responses of large and small firms? What factors might explain these differences?
1. What are the major limitations of the survey method, and how can researchers address them?
4. Why did the regulated electric utilities display higher leverage compared to nonregulated manufacturing firms? How and why did this change after deregulation of the U.S. electricity market?
3. What does empirical evidence say about the similarity of the capital structure decisions of firms across counties?
2. What are the industry and firm-specific nonfinancial characteristics from a theoretical and empirical perspective that significantly influence the financing decision of firms?
1. What theories explain the capital structure decisions of regulated versus nonregulated firms?
6. What are the advantages and disadvantages of unlevering betas and then relevering them in estimating the cost of capital?
5. What are the practical difficulties of using the CAPM to estimate the cost of equity?
4. What is the disadvantage of using a market risk premium based on historical averages of past returns?
3. Why is the WACC typically based on market value weights of debt and equity?
2. What factors might analysts use to select comparable firms?
1. Is a firm’s WACC always the appropriate hurdle rate for its investments? If not, why not?
4. Explain why Microsoft and some other large profitable firms in the software industry use practically zero debt in their capital structure. How should Microsoft’s capital structure change if it expands globally?
3. Propose and discuss the potential capital structure–related impact of government response to the corporate scandals during 2000 and 2003 and the financial crisis during 2008 and 2009. Discuss the effect of more disclosure requirements by the Sarbanes–Oxley Act (2004).
2. Explain the mean reversion of capital structure. What is the difficulty of conducting econometric research on mean reversion? What is the problem with taking a firm’s historical average debt-to-equity ratio as its target debt-to-equity ratio?
1. Explain the long-term underperformance of firms issuing equity.
4. Propose and discuss methods to account for persistent market imperfections in capital budgeting decision making. Explain how such imperfections affect the MM model.
3. What complications exist when valuing investment projects of closely-held firms? Describe the conventional approach to determining the appropriate risk premium for such firms and discuss if the arbitrage argument is valid for them.
2. Consider tax savings and financial distress costs in estimating the effect of financial leverage on firm value. What role does the discount rate of the tax savings play in the MM model? Discuss practical ways to calculate the appropriate discount rate for the tax savings.
1. Explain the probable forms of the cost-of-debt function and the reasons for a specific relationship between the cost of debt and levered equity.
6. Which effects can capital structure adjustments have on firm value, competitiveness, and relation to shareholders?
5. How can a significant positive speed of adjustment of capital structure determine whether pecking order or market timing is the more prominent theory?
4. Is the trade-off theory or the pecking order theory the main theory behind capital structure decisions?
3. What underlying hypotheses may explain capital structure choice?
2. How has the capital structure literature evolved since 1958?
1. What are the main firm-specific determinants of corporate capital structure?
4. Does the pecking order theory explain the changes in capital structure across countries with different information asymmetry? Why or why not?
3. The trade-off theory of capital structure predicts that firms have optimal (target)debt ratios. Discuss the differences in the rate of adjustment toward optimal capital structure across countries with different legal traditions and financial structure systems.
2. Prior research establishes that a firm’s capital structure is not only influenced by firm-specific factors but also by a country’s legal traditions. Discuss how legal systems affect firms’ capital structure across countries.
1. Identify and discuss the impact of firm-specific and macroeconomic factors on capital structure decisions around the world.
4. The large corporation in which managers serve as agents for the firm’s owners is a classic example of the principal-agent relationship. In general, the firm’s owners are its investors, who include both shareholders and bondholders. Despite this, compensation contracts are usually designed to
3. Some authors argue that in the 1980s, managers had weak monetary incentives that led to stagnant firm values. For example, Jensen (1986) argues that managers have access to free cash flow and face little discipline in how they use it, except for the threat of a hostile takeover. Jensen and
2. In analyzing the relationship between capital structure and managerial incentives, studies employ substantially different settings. For example, Jensen and Meckling (1976) focus on the incentives associated with a combined managerowner; John and John (1993) focus on a principal-agent setting,
1. Modigliani and Miller (1958) illustrate that with perfect capital markets, capital structure is irrelevant for total firm value, so managers need not worry about the firm’s capital structure. Why has this result received so much attention? Could earning-based compensation “upset” this
4. What potential reasons may explain the contradictory empirical results involving stock returns and leverage?
3. What is the empirical relationship between stock returns and leverage?
2. What are the differences between the trade-off and pecking order theories of capital structure?
1. Discuss MM Proposition II and its implications on stock returns.
4. Many empirical multifactor asset pricing models include financial leverage as an additional risk factor. Under what conditions would financial leverage be a priced risk factor? Discuss whether these conditions are met.
3. Can financial constraints, defined as frictions that prevent the firm from funding all desired investments, ever be beneficial to the firm? If so, explain why.

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Capital Structure And Corporate Financing Decisions Theory Evidence And Practice 1st Edition H. Kent Baker, Gerald S. Martin - Solutions

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