Problem
I. List four protective covenants that you might be interested in as a prospective bondholder.
II. Briefly describe why these would be realistic bondholder concerns.
III. How would a convertible bondholder decide whether to exercise his rights of exchange?
IV. How do venture capital firms design successful deals?
V. Why it is likely that venture capital is disbursed in installments, rather than issuing all necessary funds at once?
VI. Calculate the annual value of an interest tax shield under the assumption that a firm maintains debt at a permanent $1,000,000 level and rate of 12%. The corporate tax rate is 35%. If there is no chance of financial distress, how does the value of the firm change as a result of this debt?
VII. How are dividends paid and how do companies decide on dividend payments?
VIII. Discuss the concept of dividend signaling.
IX. Discuss how agency problems can develop between shareholders and bondholders when the firm is experiencing financial distress.
X. Is there a rule for finding optimal capital structure?