You are an investment banker who has two meetings today. Each of these meetings entails clients requesting your services in determining the optimal capital structure for their firms. For each of the cases below, qualitatively describe whether you would recommend that the firm choose leverage which is less than, about the same as, or greater than the market average. Explain fully your reasoning.

a)

Your morning meeting is with Hyram Tech -- the CEO of the Info-SuperHiway Corporation (ISH). In the meeting, Hy reveals several aspects about ISH. First, he has been able to politic for a tax advantage from the government under the guise that the development of an information superhighway is a benefit to the national security of the U.S. The deal he has cut with the government is that the firm will not have to pay any corporate taxes. In addition, all security holders of ISH will be exempt from paying taxes on any income earned from investments in the firm. Second, he hands you an article from "Executive Compensation Magazine" which lists ISH as one of the top ten firms in America in terms of designing executive pay schedules which tie managerial compensation to stock performance. That is, Hy's own wealth has been made, through his compensation contract, very sensitive to the wealth of shareholders. Third, he describes a research project that ISH scientists are now working on. This project entails designing a more efficient communication facility than is currently available. Hy expects that the results of this research will be ready in about two years. If successful, the future costs of developing the information superhighway will be greatly reduced. However, the implementation of the new design will be quite costly. Nonetheless, the savings from the new design, if it works, will certainly be enough to compensate for the hefty initial investment.

b)

Your afternoon meeting is with Scarlett O'hara -- CEO of TV Movies, Inc. (TVM).(If this is your whole day, you must be one of the lazier investment bankers I've met.) Again, the CEO fills you in on some characteristics about the firm TVM. First, Scarlett informs you that she owns 50,000 shares of TVM stock. TVM has a total of 20 million shares outstanding. Overall, there does not seem to be much too out of the ordinary with this firm. TVM is quite profitable making many, low-budget "cash cow" films. Due to the low-budget goals of the firm, the primary asset of the firm is not the camera equipment but rather the reputation the firm has achieved throughout the years. You ask Scarlett about the veracity of the "word on the street" suggesting that she plans to convert over to filming bigger-budget movies. She confesses to you that she will consider the move sometime in the future. Although she expects the average profits from these movies to be about the same as the current films, she thinks she'll "hit more home runs".