BU393 Chapter Notes - Chapter 17: Capital Structure, Agency Cost, Cash Flow
Document Summary
An ultimate distress is bankruptcy, in which ownership of the firm"s assets is legally transferred from the shareholders to the bondholders. Bankruptcy costs tend to offset the advantages of debt. Agency costs costs of conflicts of interest among shareholders, bondholders, and managers. Agency costs are the costs of resolving these conflicts. They include the costs of providing managers with an incentive to maximize shareholder wealth and then monitoring their behaviour, and the cost of protecting bondholders from shareholders. Protective covenants parts of the indenture or loan agreement that limit certain actions a company takes during the term of the loan to protect the lender"s interest. Negative covenant part of the indenture or loan agreement that limits or prohibits actions that the company may take. The firm may not merge with another firm. Positive covenant part of the indenture or loan agreement that specifies n action that the company must abide by.
