公司理财本科班第八讲红利政策和资本结构.pptVIP

Risk shifting: The firm can invest $10 and can have a payoff of $120 (10% probability); or a payoff of $0 (90% probability). This is a very risky project that would normally be rejected as it has a negative NPV (–$2). [It assumes a discount rate of 50% for the project.] This is a high-risk investment, but it gives the shareholders a small chance to get out of bankruptcy if the project is successful and pays $120. * Even though the firm value falls by $2, the equityholders gain $3 in value because the bond value has fallen by $5. The $10 that could have been used to pay the bond has been replaced by a risky project worth only $8. So they accept the project. This is called risk shifting. The bond value drops by $5. This game is played at the expense of the bondholders. Stockholders, when faced with bankruptcy, might be tempted to take high-risk projects, even with negative NPVs, in an effort to avoid bankruptcy. This is an error of omission, as normally firms would not accept such a high-risk project with negative NPV. * Here is an opportunity to invest in a safe project (NPV = +$5) by investing $10. The value of the bond increases by $8. The value of the firm increases by $15. The value of equity increases by only $7. Therefore, shareholders will reject this project. Conflicts of interest may lead to errors of omission, as normally firms would accept such a project. Here shareholders are refusing to contribute equity capital. * Example 18.1 Consider the case of Henrietta Ketchup, a budding entrepreneur with two possible investment projects that offer payoff detailed in the table. * These are two theories that try to reconcile theory and practice. A firm’s capital structure decision is a trade-off between interest tax shields and the costs of financial distress. The above results are consistent with the assertion that managers have more information than investors, or informational asymmetry. Pecking-order theory states that firms prefer to issue d