E. I. Du Pont de Nemours and Company (1983)

Finding the perfect capital structure in terms of risk and reward can ensure a company meets shareholder expectations and protects a firm in times of recession. Capital structure refers to how a business puts its money to “work”. The two forms of capital structure are equity capital and debt capital. Both have their benefits and limitations. Striking that perfect balance between the two can mean the difference between thriving versus trying to survive.

2) Is Diageo’s current capital structure appropriate to its new business? It believes that it has traditionally had a conservative debt policy. If so, is that policy still appropriate? Has Diageo’s capital structure been as conservative

Then, in the 1990s, bonds were created consisting of subprime mortgages, which were higher risk mortgages with high interest rates, made to borrowers with lower credit levels. Essentially, banks were handing out mortgages like candy to consumers who were never going to be able to make the payments, but Wall Street kept buying and packaging the mortgages into bonds. Since these bonds were inherently riskier, one wonders why investors were still willing to buy. Investors, who look at ratings by agencies such as Moodys and Standard & Poors, had no reason to believe these bonds were risky investments. The agencies, whom were being paid by Wall Street, were assigning high ratings to these risky bonds.

40%/9% Bonds and Common Stock generates a lower EPS, EBT, and Net Income in all years in comparison to the 50/50 option and is therefore not a practical capital structure option. The interest paid on bonds creates a lower EBT, net income, and total income available for common stockholders for all years in comparison to the 50/50 option. A capital structure of this mix might make banks reluctant to loan money due to the organization debt to income ratio. In addition, investors may be hesitant to invest due to the slow capital growth indicated by the

Nevertheless, the use of the Optimal Capital Structure (OCS) is the right techniques to be used in order to acquire the right combination of debt and equity that can maximize the

The main conflict that has plagued Moody's was they were paid by the same institution that issued the bonds it rated. The core of Moody's business was rating the safety and the security of the bonds issued by companies, government, and the public agencies alike. Their main goal was to satisfy the bond issuers who naturally would seek out the highest possible rating. However, this conflicted with investors who were more interested in seeking out a naturally accurate rating that was not false. Moody's was also tasked to rate to the creditworthiness of the various branches of the mortgage-backed security. Investors had no ideas as to how to assert the safety and security because products were grouped and sold in multiple shares to other investors. To resolve the conflict the relationship between the issuer of bonds and rating agencies should be better handled. This can occur in the form of the Securities and Exchange Commission to determine the best possible approach for this to occur. As well as for the house of representative to audit credit rating companies, investors, and

Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings are still suffering from their role in the crisis. These credit-rating companies would mark many bad investments with “AAA” ratings even though more than 70 percent of their collateralized debt obligations (CDOs) defaulted. They would ignore the major risks and marketed the risky CDOs because they were being paid to get the deals (Krantz, 2013). To decrease the probability of inappropriate ratings from happening again, there should be more regulations and monitorizations of all the credit-rating agencies. Revenues of credit-rating agencies should also not be allowed to be based on how many investments they can rate highly. Furthermore, before the crisis, investors would rely too greatly on ratings instead of doing their own due diligence. Therefore, investors should also rely less on the

b) The ratings methodologies employed by these various bond rating agencies are a mixture of financial performance, information and subjective objectives and management quality information. All of this information is synthesized for the purpose of using it to predict the creditworthiness of the bond issuer, which is inversely related to the risk of default. Based on the above bond rating methodology,

2. a. What is the PV of tax benefits from the three restructuring options given in Exhibit 3? Assume that the company’s debt is perpetual debt.

Capital refers to the combination of debt and equity used to finance a company to purchase what they need to manufacture their products or provide services based on its operations ADDIN EN.CITE Baker20111(Baker & Martin, 2011)116Baker, H.K.Martin, G.S.Capital Structure and Corporate Financing Decisions: Theory, Evidence, and Practice2011New JerseyJohn Wiley & Sons9780470569528http://books.google.co.ke/books?id=lq69IY1P5tgC( HYPERLINK l "_ENREF_1" o "Baker, 2011 #1" Baker & Martin, 2011). In the following report, we consider three companies namely Mattel, Clorox and MGM Resorts International whose operations are different and make recommendations for their capital structure which refers to the way the companies finance their assets through combination of debt and equity while considering the nature of business, riskiness of each of the company and the advantages and disadvantages of debt over equity financing.

1. Which of the following would increase the likelihood that a company would increase its debt ratio in its capital structure?

The objective of the capital structure is to reduce the cost of capital. Though debt is cheaper than the

For example, a collateralized debt obligation is a bond that is issued on the performance of a debt obligation, such as an automobile loan, commercial or residential mortgage, credit card loan, or student loan. CDOs, backed by real estate, create a number of ethical quandaries: 1) they are contingent upon the performance of the buyer to fulfill their responsibilities of the contract; 2) they are contingent upon the value of the property; 3) market appetite for these assets can affect the health of the company, possibly triggering a recall of the very loans the bonds are based upon; 4) they are not subjected to rigorous regulation by the SEC or other government agency. Some of these bonds were underwritten, or protected from default, by private banks, while government-sponsored enterprises such as Fannie May and Freddie Mac underwrote the remainder of them.

Mrs Barbara Kravitz states to use the corporate target capital structure of 45 percent debt for each division. Hence, this unique capital structure implies not to account for different application and management in the several divisions. Moreover, some divisions can be threatened not being competitive in their market. This is, because divisions operate in diverse markets with differing market conditions. So the risks are not assigned to the divisions of the company but to the corporate average. For instance, low-risk divisions have to accept higher a higher cost of capital, whereby high-risk divisions have to pay less for their risk relative to the market, i.e. this approach does not account for risk-adjusted cost of capital.

To understand how the CRAs played a major role in the crisis, we must first understand why they became such a significant influence on investor perception. Investors- both individual and institutional look at the CRAs to provide them with risk analysis of a debt security, in form of a credit rating, which is instrumental to these investors’ decision-making process. The risk originates due to two main factors: the ultimate mortgage holders never having met the debtors, and the sheer complexity of these securities that comprise of parts of a plethora of loans. Most individual investors lack the resources to gauge the creditworthiness of these loans. This