Chapter 11 - Capital Structure

Question 1

Pari-Passu

Answer 1

“on equal footing” in Latin

-Investors given equal priority

Question 2

“on equal footing” in Latin

-Investors given equal priority

Answer 2

Pari-Passu

Question 3

Primary Offerings

Answer 3

These are new shares sold to raise new capital

Question 4

Secondary Offerings

Answer 4

These are existing shares which are sold by current shareholders, thus closing their position in the company

Question 5

MM Prop I

Answer 5

The value of a firm is unaffected by its capital structure

Question 6

Perfect Capital Market satisfies

Answer 6

1. ) Capital markets are perfectly competitive
2. ) Capital markets are frictionless
3. ) Financing and investment decisions are independent of each other

Question 7

MM Prop II

Answer 7

The cost of capital of a levered equity increases with the firm’s debt-to-equity ratio

Question 8

Estimating Debt Overhang

Answer 8

Equity Holders will benefit from a new investment requiring investment I only if:
[(NPV/I) > (BetaDebt / BetaEquity)]