Based upon the financing hierarchy described in the textbook, what types of securities would you expect financially strong firms to issue? What about financially weak firms? Why?

Question 

There is a significant cost to bankruptcy since the stock price essentially goes to zero. Comment.

 

Question 

Studies indicate that the direct cost of bankruptcy is small. What are the direct costs? What are the indirect costs of bankruptcy? What types of firms are most exposed to these indirect costs?

 

Question 

Debt is always cheaper than equity. Therefore, the optimal debt ratio is all debt. How would you respond?

 

Question

ABC Company has $15 million in pretax income, a tax rate of 30%, and a capital structure mix that is comprised of 78% in equity and 22% million in long term debt [market value basis]. The cost of debt is 9% and cost of equity is 12%.

a) What is the company's weighted average cost of capital?

b) What is the value of the company?

 

REFERENCE: Capital Structure and Corporate Financing Decisions: Theory, Evidence and Practice (H. Kent Baker & Gerald S. Martin)

Answer rating: 100% (QA)

1 Financially strong firms would typically issue securities such as common stock preferred stock and bonds as these are considered to be the safest an... View the full answer