PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 32, Problem 2PS
a)
Summary Introduction
To determine: Whether the statement is true or false.
b)
Summary Introduction
To determine: Whether the statement is true or false.
c)
Summary Introduction
To determine: Whether the statement is true or false.
d)
Summary Introduction
To determine: Whether the statement is true or false.
e)
Summary Introduction
To determine: Whether the statement is true or false.
f)
Summary Introduction
To determine: Whether the statement is true or false.
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Assume a Modigliani and Miller economy. Company XYZ is currently financed only withequity. The management of the company hires a consultant. The consultant makes thefollowing suggestion: “My advice for XYZ is to issue debt and use it to repurchase some ofthe company’s equity. This would allow XYZ to get the benefit of a low cost of capital ofdebt without raising its cost of capital of equity.”Discuss in detail the statement of the consultant.
True or False: Private equity investors can easily sell or exchange their investments for cash anytime?
True or False: Private equity firms only invest in small companies?
True or False: Everything else stays the same. If a company's gross debt amount increases, its equity value decreases?
Venture capital (VC) firms are pools of private capital that typically invest in small, fast-growing companies, which usually can’t raise funds through other means. In exchange for this financing, the VCs receive a share of the company’s equity, and the founders of the firm typically stay on and continue to manage the company.
Describe the nature of the incentive conflict between VCs and the managers, identifying the principal and the agent.
VC investments have two typical components: (1) managers maintain some ownership in the company and often earn additional equity if the company performs well; (2) VCs demand seats on the company’s board. Discuss how these two components help address the incentive conflict.
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PRIN.OF CORPORATE FINANCE
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- Which of the following is/are NOT true about private equity? (select all that apply) a.Three levers to increase equity value are multiple expansion, EBITDA growth, and cash generation. b. Private equity investors can easily sell or exchange their investments for cash anytime. c. Private equity firms only invest in small companies. d. Everything else stays the same. If a company's gross debt amount increases, its equity value decreases.arrow_forwardWhich of the following statement is correct? O A. Firms that do not take on debt as part of their capital structure are known as leveraged firms. O B. Pecking order theory implies that profitable company will have more debt capacity. OC. According to pecking order theory, firms prefer external financing first. O D. The greater amount of debt carried by a firm, the lesser chance of bankruptcy.arrow_forwardThe DISADVANTAGES of equity finance are KELEMAHAN kewangan ekuiti i. Entrepreneur does not have total control of the company. /Usahawan tidak mempunyai kawalan menyeluruh syarikat ii. Equity Investors do not always agree to the plans of the business/ Pelabur Ekuiti tidak selalu bersetuju dengan rancangan perniagaan iii. Arranging equity financing is much more complex /Mengatur pembiayaan ekuiti adalah lebih kompleks iv. Entrepreneur does not have to repay the money invested/injected into the company/ Usahawan tidak perlu membayar balik wang yang dilaburkan/disuntik ke dalam syarikat Select one: A. iii and iv /iii dan iv B. i,ii and iii./ i,ii dan iii C. ii, iii and iv /ii, iii dan iv D. All above/ Semua di atasarrow_forward
- The practical benefit of ownership in the firm for shareholders is that... The practical benefit of ownership in the firm for shareholders is that... they receive a constant dividend even when time are not so good for the company. they can trade their shares of stock for bonds any time they want. This is known as a swap trade. they receive any of the residual income from the firm's operationsarrow_forwardHomemade leverage is employed when a(n)............. : A)corporation uses debt to pay dividends to sharcholders. B)corporation uses debt exclusivcly to fund a corporate expansion project. C)investor uses debt to change ihls or her ckposure to financial loverage firm increases its level of debt. D)firm cinoloys any amount of debe in its capitalarrow_forwardWhich of the following is true about IPO? A) Investment banks form underwriter syndicate.B) Road show is not necessary.C) Book buildings are only open to private equities.D) IPO bid winner will pay higher price than the true value of the stock.arrow_forward
- The Enterprise Value of a privately-owned firm is often discounted relative to their publicly-traded counterparts because: a. A privately-owned firm cannot be sold as easily as a publicly-traded firm. b. Employees will leave a privately-owned firm if sold. c. The use of bank debt by privately-owned firms is troubling. d. It is too difficult to calculate Enterprise Value for a privately-owned firm. e. None of the above.arrow_forwardN2 Part of road show to promote a firm’s IPO is called book building where institutional investors submit their intention to how many shares at what price levels. The investment bank will use this information to determine an offer price such that it can raise most capital. It seems that intentionally submitting lower prices would benefit the institutional investors, however the investment bank does not have to worry about this potential cheating behavior. True Falsearrow_forwardPlease tell the procedure of investment banker, from the event that Company decide to issue IPO until investment banker sell all of it that buy from the company to the stock market, ( Do my understand that the market is always secondary market and investment banker is always underwriting firm is true?). - Does investment banker receive any fee from Issuer Company) , if any what's it called?arrow_forward
- Which of the following is INCORRECT description for private equity transactions? Group of answer choices a. There are liquid public markets for privately held securities such as NASDAQ. b. The process of creating value in private equity, whether building a brand-new company or turning around an established one requires significant time and means a long-term relationship. c. The general partner participates actively in the governance of the investment d. Private equity investing is a lot of work as gaining access to better opportunities requires active sourcing and negotiationarrow_forwardQUESTION 1 The DISADVANTAGES of equity finance are…. i. Entrepreneur does not have total control of the company. /Usahawan tidak mempunyai kawalan menyeluruh syarikat ii. Equity Investors do not always agree to the plans of the business/ Pelabur Ekuiti tidak selalu bersetuju dengan rancangan perniagaan iii. Arranging equity financing is much more complex /Mengatur pembiayaan ekuiti adalah lebih kompleks iv. Entrepreneur does not have to repay the money invested/injected into the company/ Usahawan tidak perlu membayar balik wang yang dilaburkan/disuntik ke dalam syarikatarrow_forwardVenture capital (VC) firms are pools of private capital that typically invest in small, fast-growing companies that can't raise funds through other means. In exchange for this financing, VCs receive a share of a company's equity, and the founders of the firm typically stay on and continue to manage the company. A VC firm wants management to focus on improving while the managers may also act to increase VC investments have two typical components: (1) managers maintain some ownership in the company and often earn additional equity if the company performs well; (2) VCs demand seats on the company's board. Management ownership serves to the alignment of the incentives of managers with the incentives of owners.arrow_forward
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Financial leverage explained; Author: The Finance story teller;https://www.youtube.com/watch?v=GESzfA9odgE;License: Standard YouTube License, CC-BY