CHAPTER 13Capital Structure Decisions: The Basics

11/19/97

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Table of Contents

CHAPTER 13Capital Structure Decisions: The Basics

What is business risk?

Factors That Influence Business Risk

What is operating leverage, and how does it affect a firm’s business risk?

What is financial leverage?Financial risk?

Business Risk vs. Financial Risk

How are financial and business risk measured in a stand-alone risk framework, i.e., the stock is not held in a portfolio?

Capital Structure Theory

Assume the same facts except that the firm does not have to retire the old issue, and the old and new debt issued have the same priority of claims. What would happen to the firm’s stock price?

Calculate EPS at debt of $0, $250K, $500K, and $750K, assuming that the firm begins at zero debt and recap-italizes to each level in a single step.