chap016 - Chapter 16 CAPITAL STRUCTURE LIMITS TO THE USE OF...

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Chapter 16 CAPITAL STRUCTURE LIMITS TO THE USE OF DEBT SLIDES CHAPTER ORGANIZATION 16.1 Costs of Financial Distress Bankruptcy Risk or Bankruptcy Cost? 16.2 Description of Financial Distress Costs Direct Costs of Financial Distress: Legal and Administrative Costs of Liquidation or Reorganization Indirect Costs of Financial Distress Agency Costs 16.3 Can Costs of Debt Be Reduced? 16.1 Key Concepts and Skills 16.2 Chapter Outline 16.3 Costs of Financial Distress 16.4 Description of Financial Distress Costs 16.5 Example: Company in Distress 16.6 Selfish Strategy 1: Take Risks 16.7 Selfish Strategy 1: Take Risks 16.8 Selfish Strategy 2: Underinvestment 16.9 Selfish Strategy 2: Underinvestment 16.10 Selfish Strategy 3: Milking the Property 16.11 Can Costs of Debt Be Reduced? 16.12 Tax Effects and Financial Distress 16.13 Tax Effects and Financial Distress 16.14 The Pie Model Revisited 16.15 Signaling 16.16 The Agency Cost of Equity 16.17 The Pecking-Order Theory 16.18 Growth and the Debt-Equity Ratio 16.19 Personal Taxes 16.20 Personal Taxes 16.21 Personal Taxes 16.22 How Firms Establish Capital Structure 16.23 Factors in Target D/E Ratio 16.24 Quick Quiz
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A-196 CHAPTER 16 Protective Covenants Consolidation of Debt 16.4 Integration of Tax Effects and Financial Distress Costs Pie Again 16.5 Signaling 16.6 Shirking, Perquisites, and Bad Investments: A Note on Agency Cost of Equity Effect of Agency Costs of Equity on Debt-Equity Financing Free Cash Flow 16.7 The Pecking-Order Theory Rules of the Pecking Order Implications 16.8 Growth and the Debt-Equity Ratio No-Growth Growth 16.9 Personal Taxes The Basics of Personal Taxes The Effect of Personal Taxes on Capital Structure 16.10 How Firms Establish Capital Structure ANNOTATED CHAPTER OUTLINE Slide 16.0 Chapter 16 Title Slide Slide 16.1 Key Concepts and Skills Slide 16.2 Chapter Outline 16.1. Costs of Financial Distress Slide 16.3 Costs of Financial Distress .A Bankruptcy Risk or Bankruptcy Cost? In the MM model with corporate taxes there is no limit to the increase in firm value and equity value from the use of financial leverage. Common sense tells us that companies are not financed 100% by debt. What are some factors that hold back financial managers from using financial leverage?
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CHAPTER 16 A-197 Lecture Tip: In 1997, the remaining assets of Fruehauf Corporation, described by Barrons as “the once-dominant” manufacturer of truck trailers, were sold off for a mere $50 million, bringing an end to the story of a great firm laid low by over-reliance on debt financing. Founded in the 1940’s, the firm controlled one-third of the trailer market in the early 1980’s, but then went private in a leveraged buyout in 1986 to avoid a hostile takeover bid. Saddled with debt it found difficult to service, the firm went through a number of restructurings until the firm filed for chapter 11 in 1996. At that time its shares were delisted from the NYSE. And, as Barrons notes, “… the shareholders had been wiped out, leaving
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This note was uploaded on 12/21/2011 for the course NIKA 101 taught by Professor Temur during the Spring '11 term at Acton School of Business.

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chap016 - Chapter 16 CAPITAL STRUCTURE LIMITS TO THE USE OF...

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