Advantages and disadvantages of debt financing

Reference no: EM1356984

Part I -

1. Please explain the advantages and disadvantages of debt financing.

2. How does the use of debt financing affect the rate of return that shareholders require on their investment in the firm's shares. How does the cost of equity (i.e., the rate of return investors require on their investment in the firm's shares) change when the firm increases its use of debt. (This is 'Proposition II" of Modigliani and Miller for the Tax Case that I was working.

3. What is meant by an optimal capital structure of the firm?

Part II -

Consider three companies: Krogers, Intercontinental Hotels Group, and Whirlpool. Reflect on the nature of the business of these three companies. You are recommended to check what the beta of each of these companies is.

Based upon reviewing the nature of the operations of the companies including the nature of their customers and products, what would you recommend should the capital structure (total liabilities or debt and equity proportions) be for each of the three companies? You should relate your answers to what you wrote in your response to question (3) above. Note that I am not asking you to provide specific numbers, just 'low debt ratio', 'medium debt ratio' or 'high debt ratio'. (Do not quote the actual company's capital structure or their debt-to-equity ratios as per their balance sheet.)

Be sure to include a reference list.

Reference no: EM1356984

Questions Cloud

Specific interventions or techniques : Three specific interventions or techniques drawn from your recommended approach that you would use to help the client reach the short- or long-term goals you noted.

Show linear project management life cycle : Write a paper comparing the Linear Project Management Life Cycle and the Incremental Project Management Life Cycle.

What is the acceleration of the block : The 1 kg block is tied to the wall with a rope. It sits on top of the 2 kg block. The lower block is pulled to the right with a tension force of 20 N. The coefficient of kinetic friction at both the lower and upper surfaces of the 2kg block is = 0..

Illustrate what it takes steps to balance its budge : Illustrate what steps do you suggest that it take in order to balance its budget. What would be the affect on you if it takes steps to balance its budget, or Illustrate what would be the affect on you if it does not.

Advantages and disadvantages of debt financing : How does the use of debt financing affect the rate of return that shareholders require on their investment in the firm's shares and also discuss and explain the advantages and disadvantages of debt financing.

Personality at work and personal life : What's the benefit to having this information about your personality- both in relating to work and in relating to your personal life

Differentiate tv production-film and theatre production : How does TV production use technology. Is there a basic difference between TV production vis-a-vis film and theatre production?

Determining asset impairment loss : General Optic Corporation operates a manufacturing plant in Arizona. Due to a significant decline in demand for the product manufactured at the Arizona site-Determine the amount of impairment loss

Make an amortization schedule : On January 1, Year 1, a company issued $200,000 bonds and received $210,483 from investors. The stated rate of interest is 10% and the market rate of interest is 8 percent.

User Account

All Pages