This website uses cookies to ensure you have the best experience. Learn more

Asymmetric Information And Capital Structure Essay

734 words - 3 pages

Assignment 4

FIN 534

Rafael Diaz

Strayer University


Info Systems Technology (IST) manufactures microprocessor chips for use in appliances and other applications. IST has no debt and 100 million shares outstanding. The correct price for these shares is either $14.50 or $12.50 per share. Investors view both possibilities as equally likely, so the shares currently trade for $13.50.
IST must raise $500 million to build a new production facility. Because the firm would suffer a large loss of both customers and engineering talent in the event of financial distress, managers believe that if IST borrows ...view middle of the document...

b. Given your answer to part (a), what should investors conclude if IST issues equity? What will happen to the share price?
Investors would conclude that the firm’s equity is overpriced. Investors are willing to pay less. Therefore, the stock price will decline. They will be more investors wanting to sell the stock.
c. Given your answer to part (a), what should investors conclude if IST issues debt? What
will happen to the share price in that case?
If the firm is willing to borrow the money instead of issuing equity, this most likely means that the value of the company’s stock is undervalued or underpriced. By wanting to borrow the money instead of issuing equity, the firm is also letting investors know that the company is doing well enough to be able to do this. They will believe that the company is doing good to finance its new production facility with debt.

d. How would your answers change if there were no distress costs, but only tax benefits of leverage?
I would say that if the share price is overpriced or...

Other Papers Like Asymmetric Information And Capital Structure

Nt2580 Class Notes Essay

365 words - 2 pages today. RC2: Designed by Ronald Rivest RC4: Used in Internet browsers Symmetric Key Principles • The same key encrypts and decrypts • Symmetric Algorithms can be fast and are well suited to encrypting lots of data • They are often used once and then discarded Asymmetric Key Principle Any data encrypted by a Public Key can be decrypted only by the corresponding Private Key. Asymmetric Key Crypto Standards Standard Description Rivest

Organization Design Essay

1001 words - 5 pages by National Enterprises Limited (NEL) which in turn is majority owned by the Government of Trinidad and Tobago, and Cable & Wireless (West Indies) Limited, (C&W). NEL owns 51% of TSTT’s issued share capital, while C&W holds 49%. Under the extensive umbrella of services provided by the telecommunication organization TSTT, is the BLINK Broadband department. Launched in October 2007, BLINK Broadband is based on a superior Asymmetric

Assumptions Of Agency Theory

472 words - 2 pages Business Finance Bounded it is an idea that in making a choice, rationality of person(s) is restricted to the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision. It was suggested by Herbert A. Simon as an alternative basis for the mathematical idea of decision making, as used in economics and related disciplines; it adds up rationality as optimization, which views decision


5425 words - 22 pages synchronization over time. Inflation divergence is an indicator of structural differences between countries. However, inflation may converge even when short-run shocks are asymmetric. An unobserved component model is used to measure the relative importance of the common shocks, and a time-varying parameter model to examine whether business cycle synchronization has changed over time. The results indicate weak synchronization, although synchronization


1162 words - 5 pages of greater access to new technologies. Increased competition and access to the domestic financial system by foreign banks may improve the effectiveness of the intermediation process between savers and borrowers, thereby lowering markup rates in banking, as well as the cost of investment, and again raising growth rates. Financial openness helps to lessen asymmetric information problems and to reduce the fixed costs associated with


1532 words - 7 pages asymmetric and anti-deceive. Third, due to the difference with exchange and OTC market, OTC information disclosure should be adequate, not complete, and the relevant standards should be lower than exchange market requirement. Fourth, we insist that our disclosure requirement should consider the experience of US in the rules of multi-dimension disclosure, the implementation of differentiated information disclosure, and the role of self-regulatory

Mw Petroleum Case Study

2959 words - 12 pages equity valuation are theoretically possible, but quite difficult to apply. To implement a WACC valuation, we need to estimate Apache’s WACC at its postacquisition capital structure. This is difficult because we need to know the post-acquisition market value of Apache’s equity, which presumes we know the market value of MW Petroleum – the precise value we seek to estimate in the first place. We can get around this by solving for the WACC and the

Corporte Finace

3441 words - 14 pages Financial Leverage And Capital Structure Policy 0 Chapter Outline       The Capital Structure Question The Effect of Financial Leverage Capital Structure and the Cost of Equity Capital M&M Propositions I and II with Corporate Taxes Bankruptcy Costs Optimal Capital Structure 1 Capital Restructuring  We are going to look at how changes in capital structure affect the value of the firm, all else equal  Capital

Ef3333 Assignment1

377 words - 2 pages managers care so much about the Fed activities. 3. The family members are closed to you than a stranger. You could know the credibility of the family members but not the strangers. Under the asymmetric information, you can reduce the risk of being bad debt by borrowing the money to family members instead of the strangers. 4. The nominal interest rate=2%+6%=8%. At the end of one year, I will have $1080 in account ($1000*1.08). At that time

Venture Capital

7046 words - 29 pages venture capital subsidiary called TDICI Technology Development and Information Company of India - with headquarters at Bangalore, for taking up venture capital activity. Industrial Finance Corporation of India (IFCI) formed Risk Capital and Technology Finance Corporation (RCTC), with headquarters at New Delhi. TDICI is now known as ICICI Venture Funds Management Company Ltd. or ICICI Venture; and RCTC is now known as IFCI Venture Capital Funds

Finance Assignment

4181 words - 17 pages JOURNAL OF ECONOMICS AND FINANCE EDUCATION  Volume 9  Number 2  Winter 2010 29 Using Microsoft Corporation to Demonstrate the Optimal Capital Structure Trade-off Theory John C. Gardner, Carl B. McGowan Jr., and Susan E. Moeller1 ABSTRACT In this paper, we apply the trade-off theory of capital structure to Microsoft. We use data for bond ratings, bond risk premiums, and levered CAPM betas to compute the cost of equity and the weighted

Related Essays

Intermedoation Essay

1369 words - 6 pages backing liquid deposits which are insulated by bank capital from volatility of loans (liquidity insurance) (5) Price information: Banks tend to rely on private information, although their lending itself may thus offer information to others. (6) Incentive problems: See the asymmetric information, control and commitment theories. Banks have comparative advantage for the small and information intensive assets The evolution of financial systems and

Term Paper

7155 words - 29 pages asymmetry, to name some. This analysis can then be extended to look at whether there is in fact an optimal capital structure: the one which maximizes the value of the company, Wikipedia (2008). Assuming a perfect capital market with no transaction or bankruptcy costs, no taxes and with perfect information companies and individuals can borrow at the same interest rate, and investment decisions aren't affected by financing decisions. M&M made two

Conservation Essay

1707 words - 7 pages between shareholders and debt holders). For instance, if the owner or shareholders of a firm need to sign a contract with a manager, they must be in deep concern about whether the manager would acquire detectible overpayments or impair the company in pursue of his own interest because asymmetric information are inevitably involved between them (managers knows more about the firm than investors). As a result, investors (as well as debt holders

Jhjjnkljljlklk Essay

4251 words - 18 pages $1,800,000 will cost 12%, and all debt after $3,600,000 will cost 13%. If STN issues new common stock, a 12% underwriting cost will be incurred. STN can sell the first $200,000 of new common stock at the current market price, but to sell any additional new stock, STN must lower the price to $14. STN is at its optimal capital structure, which is 60% debt and 40% equity, and the firm’s marginal federal-plus-state tax rate is 40%. STN has the