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Chapter 16
Financial Distress, Managerial Incentives, and Information
I.
Chapter Outline
The chapter outline below is correlated to the Premium PowerPoint Lecture Slides. The Premium
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Alternative Examples to selected textbook examples are available in the Premium PowerPoint Lecture
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in the chapter outline below.
16.1
Default and Bankruptcy in a Perfect Market
(Slides 6–7)
• Armin Industries: Leverage and the Risk of Default
(Slides 8–9)
– Scenario 1: New Product Succeeds
(Slides 10–12)
– Scenario 2: New Product Fails
(Slide 13)
– Comparing the Two Scenarios
(Slides 14–17)
• Bankruptcy and Capital Structure
(Slide 18)
• Example 16.1 Bankruptcy Risk and Firm Value
(Slides 19–20)
•
Premium PowerPoint
Alternative Example 16.1 (Slides 21–23)
16.2
The Cost of Bankruptcy and Financial Distress
(Slide 24)
• The Bankruptcy Code
(Slides 25–28)
• Direct Costs of Bankruptcy
(Slides 29–32)
• Indirect Costs of Financial Distress
(Slide 33)
– Overall Impact of Indirect Costs
16.3
Financial Distress Costs and Firm Value
(Slide 36)
• Armin Industries: The Impact of Financial Distress Costs
(Slides 36–39)
• Example 16.2 Firm Value When Financial Distress Is Costly
(Slides 40–41)
•
Premium PowerPoint
Alternative Example 16.2 (Slides 42–45)
• Who Pays for Financial Distress Costs?
(Slides 46–48)
• Example 16.3 Financial Distress Costs and the Stock Price
(Slides 49–50)
16.4
Optimal Capital Structure: The Tradeoff Theory
(Slides 51–52)
• Determinants of the Present Value of Financial Distress Costs
(Slides 53–54)
• Optimal Leverage
(Slides 55–58)
• Example 16.4 Choosing an Optimal Debt Level
(Slides 60–61)
16.5
Exploiting Debt Holders: The Agency Costs of Leverage
(Slides 62–63)
• Overinvestment
(Slides 64–72)
• Underinvestment
(Slides 73–78)
•
Cashing Out
(Slide 79)
•
Agency Costs and the Value of Leverage
(Slides 80–83)
• Example 16.5 Agency Costs and the Amount of Leverage
(Slides 84–85)
• Debt Maturity and Covenants
(Slides 86–87)
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Berk/DeMarzo •
Corporate Finance
16.6
Motivating Managers: The Agency Benefits of Leverage
(Slide 88)
• Concentration of Ownership
(Slides 89–93)
• Reduction of Wasteful Investment
(Slides 94–99)
•
Excessive Perks and Corporate Scandals
• Leverage and Commitment
(Slide 100)
16.7
Agency Costs and the Tradeoff Theory
(Slide 101)
• The Optimal Debt Level
(Slides 103–104)
– LowGrowth, Mature Firms
• Debt Levels in Practice
(Slides 105–106)
16.8
Asymmetric Information and Capital Structure
(Slide 107)
• Leverage as a Credible Signal
(Slides 108–110)
• Example 16.6 Debt Signals Strength
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 Winter '12
 Dutt
 Corporate Finance

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