View Full Document

10 views

Unformatted text preview:

Chapter 16 Financial Distress Managerial Incentives and Information 1 Chapter 16 Financial Distress Managerial Incentives and Information I Basic Ideas 1 2 3 4 II The Costs of Bankruptcy and Financial Distress Note In perfect markets bankruptcy does not affect capital structure decisions Reason creditors simply take control of the firm no loss of value no cost need to look at cash flows that go to someone besides stockholders and creditors in bankruptcy A Direct Costs of Bankruptcy Direct costs Primary source of costs Ex Results of studies of average cost as a percent of pre bankruptcy value Corporate Finance Chapter 16 Financial Distress Managerial Incentives and Information 2 B Indirect Costs of Financial Distress Indirect costs Notes 1 2 difficult to measure Examples Results of studies of indirect financial distress costs C Expected Financial Distress Costs E Financial Distress Costs probability of distress x financial distress costs Notes 1 Probability of distress increases with a b 2 III Agency and Debt Agency conflicts of interest within the firm A Stockholder Bondholder Conflict and the Agency Cost of Debt Note all of the following issues are more significant if the firm is in financial distress Corporate Finance Chapter 16 Financial Distress Managerial Incentives and Information 3 1 Excessive Risk Taking Basic idea Reason 1 Bondholder claim downside risk upside risk 2 Stockholder claim upside risk downside risk 2 Under investment in positive NPV projects Basic idea Notes 1 2 3 Cashing Out Basic idea Reason Corporate Finance Chapter 16 Financial Distress Managerial Incentives and Information 4 4 Agency Costs Covenants and Debt Debt covenant agreement in debt contract that places restrictions on the firm Role of debt covenants Benefit of covenants Cost of covenants B Stockholder Manager Conflict and the Agency Benefit of Debt Key idea the interests of managers and owners may not be the same 1 Ownership and the Sharing of Benefits and Costs a Basic ideas 1 if



Access the best Study Guides, Lecture Notes and Practice Exams

Loading Unlocking...
Login

Join to view Ch16PLN and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Ch16PLN and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?