ASSIGNMENT | Analyze the Risk and Value Implication for Capital Structure Issues

Write an assessment in which you address the following problems/questions:

1. Evaluate the leverage implications of debt financing choices. You should include in your discussion the decomposition of ROE model. There are also some graphical analyses that should be used in showing the leverage implications for EPS. You should develop some numerical illustrations to argue your points.
2. Critique the capital structure theory by explaining the conditions with and without taxes as well as the implications of bankruptcy costs. There should be the development of graphical illustrations of the arguments. Include a discussion of signaling theory, the constraining managers’ theory, the pecking order hypotheses, and the windows of opportunity theory.
3. Compare and contrast the actual debt choices that firms tend to make, including how the choices seem to adjust across industries. Describe why you believe that some industries make use of a lot of debt, while others use very little.

Support your paper with at least three (3) resources. In addition to these specified resources, other appropriate scholarly resources, including older articles, may be included. Your paper should demonstrate thoughtful consideration of the ideas and concepts presented in the course by providing new thoughts and insights relating directly to this topic.

SAMPLE SOLUTION

Leverage Implications of Debt Financing Choices

Leverage can be defined as the aftermath of using capital that is borrowed as capital used in investing so as the investor can expand the asset base of the firm as well as provide returns on the risk capital. This is a strategy in which borrowed capital is used to improve return on an investment made. In another way, leverage can also be used to define the amount of dent that is used by a firm so as to finance its assets. Another common term used is “highly leveraged company investment or property to imply more debt as compared to equity. On the other hand, owners fund and debt comprise Capital structure. Using debts or equity, the capital of a firm can be financed. By use of either option, the implications on the firm are always evident. Financing of a project through borrowing entails borrowing money through other sources like issue of bonds or also debentures or by use of loans from the bank. Since borrowing through loans is pegged on commitment to pay, the commitment should be fixed and the principal as well as…