1). Presentation to the Board of Directors, The Pros
and Con of Debt Financing
The calculation of after-tax cost of debt plays a role
in managing capital costs. You have been asked to present a few matters related
to Debt (Bond) financing to the Board of Directors.
briefly explain to the Board 1) the usual collateral position of
Bondholders (Lenders) versus Equity investors, 2) why common stockholders
can demand a higher rate of return than lenders, and 3) why you would
suggest debt (or equity) financing.
2). Modigliani and Miller: A Challenge to Capital
Financing corporate purchases and overall capital
budgeting usually requires the finance manager to assess tax rates, dividend
payout policy, weighting of capital sources, and more. However, the Modigliani
and Miller propositions state that, in most situations, it does not matter if
the firm’s capital is raised by issuing stock or selling debt. As a student you
might assume studies of capital budgeting strategies will no longer be reviewed
in coursework. Before coming to that conclusion please discuss the principles
presented by Modigliani and Miller and explain your agreement or disagreement.
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