公司金融课后题答案CHAPTER17

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1、CHAPTER17CAPITALSTRUCTURE:LIMITSTOTHEUSEOFDEBTAnswerstoConceptsReviewandCriticalThinkingQuestions1.Directcostsarepotentiallegalandadministrativecosts.Thesearethecostsassociatedwiththelitigationarisingfromaliquidationorbankruptcy.Thesecostsincludelawyersfees,courtroomcosts,andexpertwitnessfe

2、es.Indirectcostsincludethefollowing:1)Impairedabilitytoconductbusiness.Firmsmaysufferalossofsalesduetoadecreaseinconsumerconfidenceandlossofreliablesuppliesduetoalackofconfidencebysuppliers.2)Incentivetotakelargerisks.Whenfacedwithprojectsofdifferentrisklevels,managersactinginthestockholder

3、s9interesthaveanincentivetoundertakehigh-riskprojects.Imagineafirmwithonlyoneproject,whichpays$100inanexpansionand$60inarecession.Ifdebtpaymentsare$60,thestockholdersreceive$40(=$100-60)intheexpansionbutnothingintherecession・Thebondholdersreceive$60forcertain・Now,alternativelyimaginethatthe

4、projectpays$110inanexpansionbut$50inarecession.Here，thestockholdersreceive$50(=$110-60)intheexpansionbutnothingintherecession.Thebondholdersreceiveonly$50intherecessionbecausethereisnomoremoneyinthefirm.Thatis,thefirmsimplydeclaresbankruptcy,leavingthebondholders"holdingthebag.MThus,anincre

5、aseinriskcanbenefitthestockholders.Thekeyhereisthatthebondholdersarehurtbyrisk,sincethestockholdershavelimitedliability•Ifthefirmdeclaresbankruptcy,thestockholdersarenotresponsibleforthebondholders'shortfaIL3)Incentivetounder-invest.Ifacompanyisnearbankruptcy,stockholdersmaywellbehurtifthey

6、contributeequitytoanewproject,eveniftheprojecthasapositiveNPV.Thereasonisthatsome(orall)ofthecashflowswillgotothebondholders.Supposearealestatedeveloperownsabuildingthatislikelytogobankrupt,withthebondholdersreceivingthepropertyandthedeveloperreceivingnothing.Shouldthedevelopertake$1million

7、outofhisownpockettoaddanewwingtoabuilding?Perhapsnot,evenifthenewwingwillgeneratecashflowswithapresentvaluegreaterthan$1million.Sincethebondholdersarelikelytoendupwiththeproperlyanyway,whywouldthedeveloperpaytheadditional$1millionandlikelyendupwithnothin