Textbook Notes (363,689)
Canada (158,529)
Finance (37)
MGFC10H3 (13)
Derek Chau (13)
Chapter 17

Chapter 17 Notes

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Derek Chau

Chapter 17 Capital Structure Limits to the Use of Debt Notes172 Description of CostsAgency Costsagency costscosts of conflicts of interest among shareholders bondholders and managers agency costs are the costs of resolving these conflicts they include costs of providing managers with an incentive to maximize shareholder wealth and then monitoring their behaviour and the cost of protecting bondholders from shareholders agency costs are borne by shareholders173 Can Costs of Debt be ReducedProtective Covenantsbecause the shareholders must pay higher interest rates as insurance against their own selfish strategies they frequently make arrangements with bondholders in hopes of lowering ratesprotective covenantsparts of the indenture or loan agreement between shareholders and bondholders that limit certain actions a company takes during the term of the loan to protect the lenders interestprotective covenants can be classified into two types negative covenants and positive covenantsnegative covenantpart of the indenture or loan agreement that limits or prohibits actions that the company may takepositive covenantpart of the indenture or loan agreement that specifies an action that the company must abide by174 Integration of Tax Effects and Financial Distress CostsPie Againthe pie theory says that all of these claims are paid from only one source the cash flows CF of the firmCFpayments to shareholderspayments to bondholderspayments to the governmentpayments to lawyerspayments to any and all other claimants to the cash flows of the firmsthe value of the firm V is unaltered by the capital structureTVSBGLwhere S is the value to shareholders B is the value to bondholders G stands for government and taxes Tand L is for lawyers the cash flows to the claim L rise with the debtequity ratioessence of MM intuition and theory V is VCF and depends on total cash flow of the firm capital structure cuts it into slicesmarketed claimsclaims that can be bought and sold in financial markets such as those of S and Bnonmarketed claimsclaims that cannot be easily bought and sold in financial market such as those of G and LVSBGLVVwhere V is the value of the marketed claims and V is the value of the nonmarketed claimsTMNMN177 The PeckingOrder TheoryRules of the Pecking Ord
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