Essay Questions: – Marks ( 2.5 x 4 = 10 )
Q-1. List four protective covenants that you might be interested in as a prospective bondholder. Briefly describe why these would be realistic bondholder concerns. How would a convertible bondholder decide whether to exercise his rights of exchange? ( Words- 300 to 400 )
Q-2- How do venture capital firms design successful deals? Why it is likely that venture capital is disbursed in installments, rather than issuing all necessary funds at once? ( Words- 300 to 400 )
Q-3- (A)- 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?
(B)- How are dividends paid and how do companies decide on dividend payments? Discuss the concept of dividend signaling. ( Words- 250 to 350 )
Q-4- Discuss how agency problems can develop between shareholders and bondholders when the firm is experiencing financial distress. Is there a rule for finding optimal capital structure? ( Words- 300 to 400 )
