Analyzing a Firm's Capital Structure and its Impact on Performance

The purpose of this assignment is to analyze a firm's capital structure and its impact on firm performance. Within the assignment, explain core concepts related to business risk and recommend sound financial decisions based on analysis of a firm's capital structure and capital budgeting techniques. For Part A and Part B

1. While APA style is not required for the body of this assignment, solid academic writing is expected, and documentation of sources should be presented using APA formatting guidelines.

2. This assignment uses a rubric. Please review the rubric prior to beginning the assignment to become familiar with the expectations for successful completion.

3. You are required to submit this assignment to LopesWrite.

Benchmark Information

This benchmark assignment assesses the following programmatic competencies: MBA and MSN

9.1 Recommend sound financial decisions based on analysis of a firm’s capital structure and capital budgeting techniques. MBA

3.1 Recommend sound financial decisions based on analysis of a firm’s capital structure and capital budgeting techniques.MBA in Finance

3.1 Recommend sound financial decisions based on analysis of a firm’s capital structure and capital budgeting techniques.

5.1 Analyze a firm’s capital structure and its impact on firm performance.

Assume you have just been hired as a business manager of PizzaPalace, a regional pizzarestaurant chain. The company’s EBIT was $120 million last year and is not expected togrow. PizzaPalace is in the 25% state-plus-federal tax bracket, the risk-free rate is 6 percent,and the market risk premium is 6 percent. The firm is currently financed with all equity, and it has 10 million shares outstanding.

When you took your corporate finance course, your instructor stated that mostfirms’ owners would be financially better off if the firms used some debt. When yousuggested this to your new boss, he encouraged you to pursue the idea. If the companywere to recapitalize, then debt would be issued, and the funds received would be used torepurchase stock. As a first step, assume that you obtained from the firm’s investment banker the following estimated costs of debt for the firm at different capital structures:

Percent Financed

with Debt, wd rd

0% —

20 8.0%

30 8.5

40 10.0

50 12.0

Using the free cash flow valuation model, show the only avenues by which capitalstructure can affect value

.

(1) What is business risk? What factors influence a firm’s business risk?

(2) What is operating leverage, and how does it affect a firm’s business risk? Show the operating break-even point if

ead the Chapter 15 Mini Case in Financial Management: Theory and Practice (page 601-646). The mini case is on page 645. Using complete sentences and academic vocabulary, please answer questions a and b. Allow for 400 word count

RUBRIC

Answer to question A is extremely thorough and supported with substantial relevant details.

Answer to question B is extremely thorough and supported with substantial relevant details.

PART B

Write a 400 word recommendation of the financial decisions you propose for this company above based on an analysis of its capital structure and capital budgeting techniques. Explain why you chose this recommendation. Allow for 400

Be sure to include as many of these words and ideas within the discussion as possible (more points will be added). These are all straight from the book (Brigham & Ehrhardt) 

Financial risk verses business risk, operating leverage/financial leverage and ROE, capital structure, capital structure theory, MM model,  managing the maturity structure of their debt?, operating break-even point; Capital Structure Theory: The Modigliani

or Miller Models, tax savings due to interest (TSt), interest tax shield/ tax shield, financial

distress costs, tradeoff theory, symmetric information or asymmetric information, signaling theory, borrowing capacity, pecking order hypothesis, leveraged buyout (LBO), underinvestment problem., refunding operation, optimal capital structure, unlevered beta or Hamada equation, recapitalization, optimal capital structure, target capital structure, bait-and-switch.

RUBRIC

1. An analysis of a firm's capital structure and its impact on the firm's performance is extremely thorough and supports with substantial relevant details.

2. Recommendations for proposed financial decisions based on analysis of capital structure and capital budgeting techniques are extremely thorough and include substantial supporting details and examples.

3. Writer is clearly in command of standard, written, academic English.

4. In-text citation and references with appropriate links are used