Armstrong Production Company a Study in Capital Structure

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The Armstrong Production Company is an industry-leading firm in the field of manufacturing synthetic building materials for homes and commercial structures, based near St. Louis. Armstrong was fortunate in its initial stages to quickly secure inexpensive funding in the form of developmental loans issued by the State of Illinois, and thus was able to break even within three years of its founding in the early 1970s. Able to pour resources into its research and development segment, riding on the increasing demand for construction materials from the 1970s to 1980s, and issuing 15 million shares for the company in an initial public offering (20% of this is currently owned by the board of directors, with another 13% controlled through the…show more content…
…How an increase or decrease in business risk alters the cost of capital, the optimal capital structure, and future budgeting decisions, and… 6. …How adding and paying off debt in various stages affects risk. For this we will look at two scenarios in which $30 million at 10% is added to Armstrong’s existing debt, followed by either another load of debt of $100 million at 11% and using $30 million of that to pay off the previous debt issue and $70 million to buy back stock, or by simply adding another $70 million in debt without using it to pay off the previous $30 million debt issue. When analyzing capital structure, it is first important to understand what exactly what types of risk we need to identify. To clearly gain a full idea of how capital structure affects a business’s ability to stay in operation, we must identify its business and financial risks. A business risk is one which affects a company’s ability to pay for its operations – its wages, rent, utility bills, supplies, and the like. A financial risk is one which affects a company’s ability to repay creditors. Financial risk is closely tied to the amount of debt that a company has already assumed, as debt accumulates interest which must be considered and eventually addressed. On the other hand, business risk is not, in theory, affected by the amount of debt that a company owes, and therefore we
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