1. What are some factors a manager must consider when making a financing decision?

2. In a perfect capital market, can you alter the firm’s value or WACC by relying more
on debt capital?
3. How does the interest tax deduction affect firm value?
4. What are the direct costs of bankruptcy?
5. According to the tradeoff theory, how should a financial manager determine the
right capital structure for a firm?

1. Managers may make decisions that:

Benefit themselves at investors’ expense
Reduce their effort
Spend excessively on perks
Engage in “empire building”

2. The higher the firm’s leverage, the more the firm exploits the tax advantage of debt,
and the lower its WACC
3. It increases the firm’s value
4. Average direct costs are 3% to 4% of the pre−bankruptcy market value of total assets
Likely to be higher for firms with more complicated business operations and for firms
with larger numbers of creditors

5. Managers may make decisions that:

- Benefit themselves at investors’ expense
- Reduce their effort
- Spend excessively on perks
- Engage in “empire building”