Business Homework Solutions
Problem
#10627

Optimal capital structure: You have been hired as a financial consultant by two firms, Alright Industries (Firm A), and Zelda Ltd. (Firm Z). Firm A is in the fast-growing microcomputer retail sales industry, while Firm Z manufactures office equipment such as pencil sharpeners, staplers, and tape dispensers. Your job is to recommend the optimal capital structure for these 2 firms. Discuss the factors that would influence your decision, and specifically how each of the factors applies to each firm.

You have been hired as a financial consultant by two firms, Alright Industries (Firm A), and Zelda Ltd. (Firm Z). Firm A is in the fast-growing microcomputer retail sales industry, while Firm Z manufactures office equipment such as pencil sharpeners, staplers, and tape dispensers. Your job is to recommend the optimal capital structure for these 2 firms. Discuss the factors that would influence your decision, and specifically how each of the factors applies to each firm.
Additional information about the 2 firms:

a. Firm A generally leases it stores, while Firm Z purchases its plants.
b. Firm A's stock is widely held, while the family of Firm Z's founder holds 40% of its stock.
c. Firm Z has a significant amount of accelerated depreciation expense each year, while Firm A has almost none.
d. Firm A has demonstrated high growth and profitability over the last few years. On the other hand, Firm Z's growth has averaged a modest 5% per year, and its profit margins and Return On Equity (ROE) have been unspectacular.

Be thorough in your discussion.

taxes, information assymetry, non interest tax shelters, depreciation, Uniqueness of assets


Solution Summary

The solution discusses the factors that influence capital structure and recommends capital structure for two firms.

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