It is about the Higgins 5-Factor Model. You are asked to elaborate on each way the use of debt can produce benefits and incur costs for a business through its impact on the firms operating income. Explain why there is no formula a company can follow to determine the amount of debt it can use to finance its capital projects. You can use evidence and arguments outlined in the chapter.

The Higgins 5-Factor Model

Identifies five ways in which company financing can affect operating income:

Tax benefits:	due to the tax deductibility of interest
Distress costs:	imposed by various parties when concerns arise about a companys ability to honor its financial obligations
Financial flexibility:	the possibility that high debt levels will limit future financing options
Market signaling:	the information managers convey when they opt for one form of financing over another
Management incentives:	the increased pressure to generate cash flows to meet high debt service obligations

Emphasizes that the financing decision involves a careful assessment of each factor in light of the companys specific circumstances.

Suggests that rapidly growing businesses are wise to maintain conservative capital structures, while slow-growth firms may want to consider the opposite strategy.