1. What is capital structure?
2. What is financial leverage?
3. How does financial leverage relate to firm risk and expected returns?
4. Modigliani and Miller demonstrated that capital structure policy is irrelevant. What is the basis for their argument? What are their Propositions I and II?
5. How does the introduction of corporate taxes affect the M&M model?
6. How do the costs of bankruptcy and financial distress affect the M&M model?
7. What are agency costs? How can the use of debt reduce agency costs associated with equity?
A few years after being appointed financial manager at Sedona Fabricators, Inc., you are asked by your boss to prepare for your first presentation to the Board of Directors. This presentation will pertain to issues associated with capital structure. It is intended to ensure that some of the newly appointed, independent board members understand certain terminology and issues. As a guideline for your presentation, you are provided with the following outline of questions.