Question

Explain what capital structure theory (or theories) best describes the following situations. Make sure to cite at least one of the required textbook chapters for each answer, and to cite at least two references for this section:

A CEO decides to borrow $50,000 in new debt, and the share prices rise dramatically. He then decides to sell half of his own personal shares, and when this is reported in the Wall Street Journal, the share prices drop dramatically in value.

The corporate tax rate rises from 35% to 45%, and the XYZ Corporation decides to issue more debt. A year later, bankruptcy laws are changed to become much stricter and costlier. XYZ then decides to pay back half of its debt.

A CEO named Joe Bigwig is known for living large with very expensive cars and a huge mansion. Joe is seeking a large loan from a bank to finance some new projects for his corporation. However, the bank becomes concerned when they find out that he recently used company funds to buy a brand-new company jet and also schedules numerous business trips to Hawaii and stays in five-star hotels. The bank tells Joe he will receive the loan only if he agrees to scale back on his personal expenses and not give himself or any other executives a raise until the loan is paid back.

Answer 1

Answer:-

Explanation :-

1) when a company wants to finance a new venture or expiation they company in this case will cause a $50,000 debt.

In order to cover the debt, the CEO will useEquity Financing. By using common stock, preferred stocks, and bonds as collateral.

● 2) Increasing a company's debt ratio will typically increases the marginal cost of debt and equity financing.

However this action still may lower the company weighted average cost of capital (WACC).

● 3) Finance is the keeper of corporate funds in all companies, public or private, so whenin doubt, companies have to investigate regardless of level/title. When there are multiple shareholders they should know about these expenses, if you choose to solve the problem directly, you must talk with the CEO. If you choose an indirect route, you can indicate in the monthly summary to the shareholders that there are unresolved expenditures in the books. This might start the snowball rolling down the hill in terms of people asking questions. This allows you to put the uncomfortable task of questioning the CEO on others rather just upon your own shoulders. If the actions are clearly violating the company travel policy or the IRS requirements, the Controller is required to act in order to protect company assets and protect the company against violation of tax regulations. In addition, if this behavior is known by other employees of the company, looking the other way sets the wrong tone at the to" and may encourage inappropriate behavior by other employees.