Problem Set 3 - NYU Stern School of Business Corporate...

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NYU Stern School of Business Corporate Finance B40.2302.11, .12 Fall 2001 Problem Set #3 Due in class, December 5 th (.11 section) or 6 th (.12 section). Hard copy is strongly preferred, but if you can’t attend class, you can email solution by 6pm December 5 th to Keith Siilats [[email protected]]. Can work in teams of up to three students. Be sure to list all team members’ names. The questions are equal-weighted unless otherwise indicated. 1) Suppose a company is generating a high level of very steady income. Generally speaking, what sort of debt-equity ratio does the trade-off theory of capital structure recommend for this firm? Why? (3 sentences) 2) Suppose a company has low and erratic income, sometimes positive, sometimes quite negative. What sort of debt-equity ratio does the trade-off theory of capital structure recommend? Why? (3 sentences) 3) Suppose a company has determined that its equity is overvalued, and will underreact to the “bad news” of an equity issue.
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