Chapter 16

Chapter 16 .
Cost of financial distress is divided in two:
1. Direct cost: e.g. lawyer and accountant fees during the bankruptcy
2. Indirect cost: e.g.
* Inspired ability to conductbusiness
* Incentive to take on risk projects
* Incentive toward underinvestment
* Distribution of funds to stockholders prior to bankruptcy

Pecking order theory implies thatmanagers prefer internal to external financing. If external financing is required, managers tent to choose the safest securities, such as debt.
** Firms prefer to issue debt rather than equity if internalfinance is insufficient.
Signaling theory suggests company announcements of an increase in dividend payouts act as an indicator of the firm possessing strong future prospects. The rationale behinddividend signaling models stems from game theory.

3 factors that determined the target debt equity ratio:
* Taxes: firms with high taxable income should rely more on debt than firms with lowtaxable income
* Types of assets: firms with a high percentage of intangible assets such as research and development should have low debt
* Uncertainty of operating income: firms with uncertaintyof operating income should rely mostly on equity.

Protective covenants: A part of the indenture or loan agreement that limits certain actions a company takes during the term of the loan toprotect the lender's interests.

Consolidation debt: The act of combining several loans or liabilities into one loan. Debt consolidation involves taking out a new loan to pay off a number of other debts.Chapter 18

Dividend: cash distribution of earnings
** A distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.

Type ofdividends:
* Regular cash dividend: paid 4 times a year, paying this kind of dividend, company reduces corporate cash and retains earnings – except in case of a liquidity dividend.
* Stock dividend:...