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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

When the Bell System was broken up, the old AT&T was split into a new AT&T and seven regional telephone companies. The specific reason for forcing the breakup was to increase the degree of competition in the telephone industry. AT&T had a monopoly on local service, long distance, and the manufacture of all equipment used by telephone companies, and the breakup was expected to open most of those markets to competition in the court order that set the terms of the breakup, the capital structures of the surviving companies were specified and much attention was given to the increased competition telephone companies could expect in the future. Do you think the optimal capital structure after the breakup was the same as the pre-breakup optimal capital structure? Explain your position.

Summary Introduction

To identify: Whether the optimal capital structure after the breakup is same as the pre-breakup optimal capital structure.

Introduction:

Capital Structure:

Capital structure refers to the securities or debt included in the total capital of the firm. Optimum capital structure is required for the optimum utilization of funds.

Answer:

No, the optimal capital structure after the breakup is not same as the pre-breakup optimal capital structure.

Explanation
  • Breakup increases the business risk of the company. The new company will face financial risk therefore, it will use less debt...

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