Flashcards in 03 Lecture Deck (11):
What are the Mezzanine financing instruments
Between Equity and Debt
- Convertible Bonds
- Preferred Stocks
- Subordinated debt
What is the most important mechanism between equity and debt
risk and return
others are (Control rights, Priority of being served)
How are equity holders are called
What explains the 27% variation in leverage
- Industry median leverage
- Firm Size
- Market-to.book assets ratio
- Expected inflation
What are the assumptions of the Modigliani-Miller Theory and what does it state?
1. No Taxes
2. No cost of bankruptcy
3. Perfect information
4. No transaction costs for issuing debt and equity
5. Investment decisions not affected by capital structure
=> Firm value is independent of its capital structure
What does the trade-off theory state?
Optimal capital structure balances tax-shield against cost of financial distress
What effects does the announcement of an equity increase have?
- Reduces the share price
- Increases the cost of equity
What does the pecking order theory state?
Pecking order theory suggests preference in financing sources
1. Retained earnings
2. Debt financing
3. External equity financing
What are the main assumptions of the free cash flow theory
- Separation of ownership and control
- Asymmetry information between management and investors?
What is the main result of the free cash flow theory?
Managers can maximize their wealth at expense of shareholders