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Why might a company with significant intangible assets prefer equity financing over debt?
Because intangible assets cannot serve as collateral, a company holding significant intangible value may find it easier to raise funds through equity rather than debt.
What is the main impact of incorporating market timing into capital structure decisions?
It allows firms to exploit temporary market conditions, issuing equity when valuations are high and debt when interest rates are low.
What is the difference between a stock dividend and a stock split?
A stock dividend distributes additional shares to shareholders without changing the total number of shares outstanding, while a stock split increases the total number of shares by splitting existing ones.
Name 3 tools that are commonly used to evaluate Real Options.
Decision Trees
Sensitivity Analysis
Option Pricing Models (e.g., Black-Scholes Model)
Why is it important to adjust reported figures for off-balance-sheet obligations in credit analysis?
Adjusting for off-balance-sheet obligations ensures a more accurate view of a company’s total debt, improving comparability across firms and aligning metrics with the company’s true financial reality.
Which hybrid instrument can be separated into a bond and an equity component, allowing investors to hold each independently?
Bonds with detachable warrants.
How do sector-specific ESG risks affect credit ratings? Provide an example.
Sector-specific ESG risks influence credit ratings based on the materiality of environmental, social, or governance factors in that industry. For instance, energy companies face downgrades due to climate transition risks, while consumer goods firms are impacted by labor or supply chain issues.
How might the certification and reporting requirements of green bonds mitigate the risk of greenwashing?
They mitigate the risk of greenwashing by ensuring transparency, accountability, and alignment with recognized environmental standards through third-party verification and regular disclosures.
What role do Discounted Cash Flow (DCF) models play in integrated valuation?
They are used to discount cash, societal, and environmental value flows to derive the total integrated value of a company.