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, describe whether you would recommend that the firm choose leverage which is less than, about the same as, or greater than the average across all firms. Explain your reasoning fully. 

a)     Your morning meeting is with the CEO of a unique biotech outfit. This firm has had a difficult past due to the high uncertainty of its ventures. Only now are they generating positive profit. In addition, the time is right to generate some high growth attractive projects and the CEO feels the market is even more optimistic than he is. On the other hand, they do indeed have some very strong human capital in the firm. Their current book value of debt is $200 million and their equity is trading at a market cap of $1 Billion and with a Market-to-Book Multiple of 5x.  

 

b) Your second meeting is with a glass manufacturer that has generated stable cash flows based on high profitability. Unfortunately, there does not seem many future positive NPV projects for the enterprise. But the solid glass manufacturer generates is expected by all to generate solid cash flows for the foreseeable future. Nonetheless, the CEO is even more optimistic than investors. Their steady EBIT this year will be $100 million and the firm has Debt of $100 million paying interest of 5%. 

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a For the biotech outfit in the morning meeting I would recommend that the firm choose leverage greater than the average across all firms Reasoning Hi... View the full answer