Reference no: EM132444188
Capital Structure and Risk of Using Debt
This issue has three parts.
On December 2, 2001, the highflying energy firm, Enron, filed for bankruptcy. This is the largest bankruptcy in U.S. history. While the factors that led to the fall of Enron are clearly not limited to use of large amounts of debt in the capital structure, the use of financial leverage was a major factor leading to its demise. The lead story in BusinessWeek's December 17, 2001, issue covered the fall of Enron. After reading the article, answer the following questions:
1. Describe the relative amount of debt that Enron carried directly versus indirectly through off-balance sheet financing.
2. The company almost avoided bankruptcy through a buyout by the firm, Dynegy, but that failed. What did Dynegy discover when it was evaluating the merger proposal?
3. What international factors also contributed to the failure of Enron?
Capital Structure Decision
How do companies decide on their capital structures? Do many publicly-traded companies have preferred stocks in their capital structures?
Business versus Financial Risk:
Explain what is meant by business and financial risk. Suppose firm A has greater business risk than firm B. Is it true that firm A also has a higher cost of capital? explain.