Assignment
# 2
72-271
Fall 2015
After
carefully comparing the different forms of financing used by Canadian companies
in the bar charts below; answer the following questions:
-
What
is the major form of financing used by Canadian companies? -
The
pecking order theory of corporate financing is used to explain the financing preference of companies in Canada.
Using the principal agent model explain the pecking order theory. -
What
explains the fluctuation in the amount of financing raised by companies in the different
years. -
In
the figure above, in all the years (except the year 2000) companies prefer debt
over equity. Why? -
Debt
can be used as a signal to bridge the information asymmetry between
shareholders (principals) and manages (agents). Explain. -
Summarise
the agency problem. Explain why the agency problem arises between principals
and agents (hint: principals and agents face different types of risks). -
Summarise
the different types of corporate governance mechanisms used to bridge the incomplete
contracts between shareholders and managers. -
Compare
angel finance with venture capital. At what stages of its growth is a start-up
likely to seek these forms of financing? -
Compare
operational risk with financial risk. Which type of risk likely to be affected
by the changes in capital structure of a company? -
How does the amount of debt impact on the
company value? Explain using the concept of tax shield.
