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LOS j: Identify and explain the costs of financial distress, the agency costs and net agency costs of equity, the costs of asymmetric information, and their relation to a company’s optimal capital structure.
Q1. Rupert Jones, a manager with Oswald Technologies, is confused about agency costs of equity and how they can be managed at his firm. To try to gain a better understanding about agency costs, Jones asks Karrie Converse, a well known consultant for an explanation. In their conversation, Converse makes the following statements:
Statement 1: Costs related to the conflict of interest between managers and owners of a business can be eliminated through a combination of bonding provisions and adequate monitoring through a quality corporate governance structure.
Statement 2: The less a company depends on debt in its capital structure, the lower the agency costs the company will tend to have.
Are Converse’s statements concerning the agency costs of equity correct?
A) Both are incorrect.
B) Both are correct.
C) Only one is correct.
Q2. Which of the following companies is most likely to have the greatest expected cost of financial distress?
A) An airline company with strong management.
B) A steel manufacturer with an average debt to equity ratio for the industry.
C) An information technology service provider with a weak corporate governance structure.
Q3. Which of the following is least likely to be categorized as a cost of financial distress?
A) Legal fees paid to bankruptcy lawyers.
B) Premiums paid for bonding insurance to guarantee management performance.
C) Having a potential merger partner pull out of a proposed deal.
Q4. Steve Cooley, the Chief Financial Officer for Canberra Corporation, decides that he wants to use as much debt as possible in his firm’s capital structure. Cooley knows that to use more debt, he will need to make a persuasive argument to his board. Which of the following arguments used by Cooley to help with his goal of raising large amounts of additional debt is least supported by empirical evidence?
A) Increasing the amount of debt has an insignificant impact on our credit risk premium.
B) The cost of debt is always cheaper than the cost of equity.
C) Raising additional debt provides a signal to our shareholders that our firm’s future prospects are positive. | 
发表于 2009-3-4 13:48
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