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1. For the agency effect, why is it beneficial for shareholders if the company delays the occurrence of bankruptcy ??
2. In the financial impact on the financial manager’s decisions, why is there a relationship between cost of capital and gearing ? does it mean like if a company wants to deliver higher rate of return for shareholders, company will find ways to finance the project to deliver that particular return ???
3. In the classic view of the irrelevance of the source of equity finance, what is it mean by “if both new equity and retained earnings have the same cost then it should be irrelevant , in terms of shareholder wealth, where equity funds come in”
I can’t even seem to guess what it means……..1. It is not automatically beneficial, but it may be because it may be possible to avoid the bankruptcy.
2. The cost of capital depends on the level of gearing – you need to watch the lectures on this.
3. This is revision of F9 and MM’s theories on the irrelevance of dividend policy. If a company uses retained earnings then they are using money that shareholders were otherwise entitled to as dividends. In theory it makes no difference whether shareholders get full dividend but then pay in money to buy new shares, or alternatively they take a lower dividend and leave money therefore in the company.
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