Corporate Finance an der Copenhagen Business School | Karteikarten & Zusammenfassungen

Lernmaterialien für corporate finance an der Copenhagen Business School

Greife auf kostenlose Karteikarten, Zusammenfassungen, Übungsaufgaben und Altklausuren für deinen corporate finance Kurs an der Copenhagen Business School zu.

TESTE DEIN WISSEN

What is a short sale?

Lösung anzeigen
TESTE DEIN WISSEN

The person who intends to sell the security first borrows it from someone who already owns it. Later, that person must either return the security by buying it back or pay the owner the cash flows he or she would have received.

Lösung ausblenden
TESTE DEIN WISSEN

What is meant by asset substitution?

Lösung anzeigen
TESTE DEIN WISSEN

being close to default can give the manager (and shareholders) the incentive to take excessive risk.

Lösung ausblenden
TESTE DEIN WISSEN

What form of financing is the least informationally sensitive?

Lösung anzeigen
TESTE DEIN WISSEN

Debt

Lösung ausblenden
TESTE DEIN WISSEN

What are the assumptions of the Modigliani-Miller Theorem?

Lösung anzeigen
TESTE DEIN WISSEN

1. There are no taxes.
2. There are no contracting costs (costs of writing or enforcing contracts such as issuance costs, default costs,...).
3. The firm’s investment policy is fixed (the firm invests in the same assets independently of its financing policy).

Lösung ausblenden
TESTE DEIN WISSEN

Is the following statement correct. The fact that the firm can default on its debt makes capital structure relevant.

Lösung anzeigen
TESTE DEIN WISSEN

True

Lösung ausblenden
TESTE DEIN WISSEN

According to the trade-off theory of capital structure. If a firm’s marginal corporate tax rate increases then its optimal leverage ratio goes:

Lösung anzeigen
TESTE DEIN WISSEN

Up

Lösung ausblenden
TESTE DEIN WISSEN

A firm generates a free cash flow of 1 next year. Starting at the beginning of next year, the free cash flow is expected to grow at a rate of 0.05 a year. The rate of return the unlevered asset should earn is 0.1. The risk-free rate is 0.05 and the corporate tax rate is 0.3. The firm decides to issue debt today and won’t change its capital structure in the future. The firm’s debt is worth 5. The firm forever only pays interest on this debt. What is the value of the levered firm?

Lösung anzeigen
TESTE DEIN WISSEN

The unlevered firm value is
1/(0.1 − 0.05) = 20.
Since the firm only issues debt today the expected present value of the tax benefits to debt are
PV (Tax benefits) τC D = 0.3 ∗ 5 = 1.5.
The levered firm is worth 20 + 1.5 = 21.5.

Lösung ausblenden
TESTE DEIN WISSEN

A firm has assets in place which generate a cash flow of 1 in one year. Furthermore, the firm has debt that comes due next year and requires a repayment of 2. Today, shareholders can invest I from their own money into the firm and this increases the cash flow the firm generates in one year from 1 to 2.55. For what value of I are shareholders indifferent between investing or forgoing the investment? Assume all cash flows are risk-less and the risk-free rate is 10%. Let I∗ be the solution to the previous question. Assume that I ∈ (I∗, 2.55/1.1). What form of agency conflict arrises in this case?

Lösung anzeigen
TESTE DEIN WISSEN

Asset substitution

Lösung ausblenden
TESTE DEIN WISSEN

Assume you’re buying a car from a seller. The seller know’s his car’s value X and he is only willing to sell it if he gets at least this value. You do not know X but you believe its somewhere between [1000, 2000]. Furthermore, you value the car at X + 500 and don’t want to pay too much for the car. What offer would you make for the seller’s car such that you have the highest chance of buying it?

Lösung anzeigen
TESTE DEIN WISSEN

Let P be any offer you would make. If P > 1500 then the seller would accept the offer if X = 1000 and you would lose money since P > 1000 + 500. Therefore, you would never make an offer larger than 1500. You are okay with offering P ≤ 1500 since X +500−P > X +500−1500 ≥ 0. To maximize the chances of the seller accepting an offer you would offer P = 1500.

Lösung ausblenden
TESTE DEIN WISSEN

Today, Firm A has a debt-equity ratio of 1. It’s return on equity is 0.10 and it’s debt is risk-free. The risk-free interest rate is 0.05 and there are no corporate taxes. The firm wants to increase its debt-equity ratio to 2. After this leverage increase the firm’s debt is still risk-free. Furthermore, its assets are unaffected by this leverage change. What is the firm’s return on equity after this leverage change? Report %/100, i.e. 5.5% ⇒ 0.055.

Lösung anzeigen
TESTE DEIN WISSEN

The unlevered cost of capital is
rU = 0.1∗ 1/2 +0.05∗ 1/2 = 0.075.
This result implies that after changing the debt-equity ratio to 2 the firm’s return on equity is
rE =rU +(D/E)(rU −rD)=0.075+2(0.075−0.05)=0.125.

Lösung ausblenden
TESTE DEIN WISSEN

What are capital market frictions that make capital structure choice relevant?

Lösung anzeigen
TESTE DEIN WISSEN

1. Tax benefits.
2. Bankruptcy costs.
3. Agency costs and benefits.
4. Asymmetric information.

Lösung ausblenden
TESTE DEIN WISSEN

What is meant by debt overhang?

Lösung anzeigen
TESTE DEIN WISSEN

Being close to default can give the manager (and shareholders) the incentive not to undertake positive NPV projects as benefits accrue to the debt holders.

Lösung ausblenden
  • 5212 Karteikarten
  • 50 Studierende
  • 18 Lernmaterialien

Beispielhafte Karteikarten für deinen corporate finance Kurs an der Copenhagen Business School - von Kommilitonen auf StudySmarter erstellt!

Q:

What is a short sale?

A:

The person who intends to sell the security first borrows it from someone who already owns it. Later, that person must either return the security by buying it back or pay the owner the cash flows he or she would have received.

Q:

What is meant by asset substitution?

A:

being close to default can give the manager (and shareholders) the incentive to take excessive risk.

Q:

What form of financing is the least informationally sensitive?

A:

Debt

Q:

What are the assumptions of the Modigliani-Miller Theorem?

A:

1. There are no taxes.
2. There are no contracting costs (costs of writing or enforcing contracts such as issuance costs, default costs,...).
3. The firm’s investment policy is fixed (the firm invests in the same assets independently of its financing policy).

Q:

Is the following statement correct. The fact that the firm can default on its debt makes capital structure relevant.

A:

True

Mehr Karteikarten anzeigen
Q:

According to the trade-off theory of capital structure. If a firm’s marginal corporate tax rate increases then its optimal leverage ratio goes:

A:

Up

Q:

A firm generates a free cash flow of 1 next year. Starting at the beginning of next year, the free cash flow is expected to grow at a rate of 0.05 a year. The rate of return the unlevered asset should earn is 0.1. The risk-free rate is 0.05 and the corporate tax rate is 0.3. The firm decides to issue debt today and won’t change its capital structure in the future. The firm’s debt is worth 5. The firm forever only pays interest on this debt. What is the value of the levered firm?

A:

The unlevered firm value is
1/(0.1 − 0.05) = 20.
Since the firm only issues debt today the expected present value of the tax benefits to debt are
PV (Tax benefits) τC D = 0.3 ∗ 5 = 1.5.
The levered firm is worth 20 + 1.5 = 21.5.

Q:

A firm has assets in place which generate a cash flow of 1 in one year. Furthermore, the firm has debt that comes due next year and requires a repayment of 2. Today, shareholders can invest I from their own money into the firm and this increases the cash flow the firm generates in one year from 1 to 2.55. For what value of I are shareholders indifferent between investing or forgoing the investment? Assume all cash flows are risk-less and the risk-free rate is 10%. Let I∗ be the solution to the previous question. Assume that I ∈ (I∗, 2.55/1.1). What form of agency conflict arrises in this case?

A:

Asset substitution

Q:

Assume you’re buying a car from a seller. The seller know’s his car’s value X and he is only willing to sell it if he gets at least this value. You do not know X but you believe its somewhere between [1000, 2000]. Furthermore, you value the car at X + 500 and don’t want to pay too much for the car. What offer would you make for the seller’s car such that you have the highest chance of buying it?

A:

Let P be any offer you would make. If P > 1500 then the seller would accept the offer if X = 1000 and you would lose money since P > 1000 + 500. Therefore, you would never make an offer larger than 1500. You are okay with offering P ≤ 1500 since X +500−P > X +500−1500 ≥ 0. To maximize the chances of the seller accepting an offer you would offer P = 1500.

Q:

Today, Firm A has a debt-equity ratio of 1. It’s return on equity is 0.10 and it’s debt is risk-free. The risk-free interest rate is 0.05 and there are no corporate taxes. The firm wants to increase its debt-equity ratio to 2. After this leverage increase the firm’s debt is still risk-free. Furthermore, its assets are unaffected by this leverage change. What is the firm’s return on equity after this leverage change? Report %/100, i.e. 5.5% ⇒ 0.055.

A:

The unlevered cost of capital is
rU = 0.1∗ 1/2 +0.05∗ 1/2 = 0.075.
This result implies that after changing the debt-equity ratio to 2 the firm’s return on equity is
rE =rU +(D/E)(rU −rD)=0.075+2(0.075−0.05)=0.125.

Q:

What are capital market frictions that make capital structure choice relevant?

A:

1. Tax benefits.
2. Bankruptcy costs.
3. Agency costs and benefits.
4. Asymmetric information.

Q:

What is meant by debt overhang?

A:

Being close to default can give the manager (and shareholders) the incentive not to undertake positive NPV projects as benefits accrue to the debt holders.

corporate finance

Erstelle und finde Lernmaterialien auf StudySmarter.

Greife kostenlos auf tausende geteilte Karteikarten, Zusammenfassungen, Altklausuren und mehr zu.

Jetzt loslegen

Das sind die beliebtesten corporate finance Kurse im gesamten StudySmarter Universum

Corporate Finance

Universität Passau

Zum Kurs
Corporate Finance

Universität Münster

Zum Kurs
Corporate Governance

Universität Duisburg-Essen

Zum Kurs
Finance

SRH Fernhochschule - The Mobile University

Zum Kurs
Finance

ZHAW - Zürcher Hochschule für Angewandte Wissenschaften

Zum Kurs

Die all-in-one Lernapp für Studierende

Greife auf Millionen geteilter Lernmaterialien der StudySmarter Community zu
Kostenlos anmelden corporate finance
Erstelle Karteikarten und Zusammenfassungen mit den StudySmarter Tools
Kostenlos loslegen corporate finance