Concept Checks

9.1: True
The pressure to increase leverage will be felt less intensely by firms that are closely held. Consequently, they are less likely to increase leverage quickly.

9.2: Greater.
For this firm, the over levering might have consequences for operating income.

9.3: Other ..
I would sell those assets where I can get the highest price relative to my estimated value. (These might be assets that are currently being over valued by the market)

9.4: $ 200 million
Since you are borrowing money to buy back stock, the value of the firm remains $ 1 billion.
If you were borrowing money to take neutral investments, you would have to borrow $250 million (20% of $1,250 million)
If you were borrowing money to take an investment with a NPV of $ 50 million, you would have to borrow $ 260 million. (The firm value will increase by the cost of the project + NPV)

9.5: Paying large special dividend or Buying Back Stock
Both will reduce equity while leaving debt unchanged, and thus increase the debt ratio.

9.6: The cost of capital of the target firm
This is the same principle we used in investment analysis. The hurdle rate for an investment should be based upon the risk of the investment (not the risk of the investor)

9.7: False
The matching of cash flows on assets and financing will reduce the likelihood of default and allow the firm to borrow more. Since there is a tax benefit from borrowing, it will increase the value of the firm.

9.8: Understate duration
We are ignoring the cash flows that occur after the artificial termination of the project.

9.9: Firms with a few large homogeneous projects
The portfolio effects will be minimal (because the projects are correlated with each other) and the project size will reduce transactions costs.

9.10: adding special features can still create value even if the bonds are fairly priced
By issuing such bonds, firms can reduce their default risk and increase their capacity to borrow.