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The purpose of the assignment research paper is to examine capital structure theory, issues, and debates,while showing how capital structure choices affect a firm’s return on investment (ROE) and its risk profile.
Your assignment is to select a publicly held company and to analyze its capital structure, applying the theories and principles found in CHAPTER 15 of the text.
The structure of your research paper should include:
- ● A preview of capital structure issues
- ● Business and financial risks related to capital structure
- ● Modigliani and Miller’s [MM] capital structure theory
- ● Criticisms of the MM model and assumptions
- ● Capital structure evidence and implications
- ● Estimating the firm’s optimal capital structureA firm’s optimal capital structure is that mix of debt and equity that maximizes the stock price. At anypoint in time, management has a specific target capital structure in mind, presumably the optimal one, though this target may change over time. For example, financial management may choose a 50% equity financing [stock] and 50% debt [bond] financing.Several factors influence a firms’ capital structure, including:
- ● Business risk
- ● Tax position
- ● The need for financial flexibility
- ● Managerial conservativeness
- ● Growth opportunitiesBusiness risk is the riskiness inherent in the firm’s operations if it uses no debt.This report is intended to be a capital structure analysis of your selected public company. Your paper is intended to be an executive summary of your analysis, and is limited to a maximum of 5–7 pages of text, excluding the title page, table of contents, graphs, charts, tables, etc.This summary report of your selected company’s capital structure should convey the quality, depth, andcompleteness of your capital structure analysis, without going into excessive detail.