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Various corporate finance questions

I need 1000 word responses to each of the questions below:

1. What are agency costs, and how are agency costs of financial distress different from agency benefits of leverage? Explain their impact on calculating the value of a firm with financial distress.

2. When securities are fairly priced, why would the original shareholders of a firm pay the present value of bankruptcy and financial distress costs?

3. What are the dividend payment process and the open-market repurchase process? In your answer, be sure to explain the effects they have in a perfect world.

4What are the benefits and drawbacks of accumulating cash balances rather than paying dividends and what effects do dividend policy have on this type of decision?

I need 250 word responses to each of the questions below:

1. What impact does asymmetric information have on the optimal level of leverage? In your answer, be sure to describe the implications of adverse selection and the lemons principle for equity issuance, as well as the empirical implications.

2. Compare and contrast mature profitable firms with stable cash flows with firms with higher risk (dependencies on economy) with unstable cash flows. What risks do they take in regards to leverage use, tax shields, and trading information between managers and investors?

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Corporate Finance
1. What are agency costs, and how are agency costs of financial distress different from agency benefits of leverage? Explain their impact on calculating the value of a firm with financial distress.
Agency cost is the cost that the owner of a business assumes if she decides not to manage the business herself, but rather hires another, an agent. The agency cost is a result of the different goals of the owner and this agent: with the owner wanting to maximize the value of the business while the agent wanting to maximize his compensation and income paid to him. On the other hand, the agency costs pertaining to a company which is in a financial distress is different from the agency cost assumed by the owner herself. In the first, this is the agency costs assumed by the creditors whose contract with the business resulting from them lending money to the company has been broken because of the distress. This agency cost could result from the owner and the agent conspiring to hide assets of the company and overstate its financial distress in order to forego paying back the debt or to have a more favorable debt repayment terms. The agency benefits of leverage accrues because whenever a business assumes debt it is likely that the creditors will demand certain concessions from the busines and will strictly monitor the company for compliance. This monitoring is beneficial to the owner since the agent is forced to perform within certain conditions.

2. When securities are fairly priced, why would the original shareholders of a firm pay the present value of bankruptcy and financial distress costs?
Even if securities are fairly priced, original shareholders of a firm will still pay the present value of bankruptcy and financial distress costs because when we say fairly priced it is priced fairly based on available information and the information about the difficulties of a firm are always known after the fact. Again this goes back to the economic concept of agency cost which is exacerbated in the case when the business is organized as a ...

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This solution provides answers to relevant corporate finance questions.

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