The purpose of this assignment is to analyze a firm’s capital structure and its impact on firm performance. Within the assignment, explain core concepts related to business risk and recommend sound financial decisions based on analysis of a firm’s capital structure and capital budgeting techniques.
Read the Chapter 15 Mini Case in Financial Management: Theory and Practice. Using complete sentences and academic vocabulary, please answer questions a and b.
Using the mini case information, write a 250-500 word recommendation of the financial decisions you propose for this company based on an analysis of its capital structure and capital budgeting techniques. Explain why you chose this recommendation.
While APA style is not required for the body of this assignment, solid academic writing is expected, and documentation of sources should be presented using APA formatting guidelines, which can be found in the APA Style Guide, located in the Student Success Center.
This assignment uses a rubric. Please review the rubric prior to beginning the assignment to become familiar with the expectations for successful completion.
You are required to submit this assignment to LopesWrite. A link to the LopesWrite technical support articles is located in Class Resources if you need assistance.
Benchmark Information
This benchmark assignment assesses the following programmatic competencies:
MBA and MSN
9.1 Recommend sound financial decisions based on analysis of a firm’s capital structure and capital budgeting techniques.
MBA
3.1 Recommend sound financial decisions based on analysis of a firm’s capital structure and capital budgeting techniques.
MBA in Finance
3.1 Recommend sound financial decisions based on analysis of a firm’s capital structure and capital budgeting techniques.
5.1 Analyze a firm’s capital structure and its impact on firm performance.
Mini case 6 chapter 15
Mini Case
Assume you have just been hired as a business manager of PizzaPalace, a regional pizza restaurant chain. The company’s EBIT was $120 million last year and is not expected to grow. PizzaPalace is in the 25% state-plus-federal tax bracket, the risk-free rate is 6 percent, and the market risk premium is 6 percent. The firm is currently financed with all equity, and it has 10 million shares outstanding.
When you took your corporate finance course, your instructor stated that most firms’ owners would be financially better off if the firms used some debt. When you suggested this to your new boss, he encouraged you to pursue the idea. If the company were to recapitalize, then debt would be issued, and the funds received would be used to repurchase stock. As a first step, assume that you obtained from the firm’s investment banker the following estimated costs of debt for the firm at different capital structures:
| Percent Financed with Debt, | |
| 0% | — |
| 20 | 8.0% |
| 30 | 8.5 |
| 40 | 10.0 |
| 50 | 12.0 |
- Using the free cash flow valuation model, show the only avenues by which capital structure can affect value.
-
- (1)
What is business risk? What factors influence a firm’s business risk?
- (2)
What is operating leverage, and how does it affect a firm’s business risk? Show the operating break-even point if a company has fixed costs of $200, a sales price of $15, and variable costs of $10.
Benchmark – Mini Case 6 – Rubric
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Rubric Criteria
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Question A
9 points
Criteria Description
Question A
- Excellent
9 points
Answer to question A is extremely thorough and supported with substantial relevant details.
- Good
7.83 points
Answer to question A is complete and includes relevant supporting details.
- Satisfactory
7.11 points
Answer to question A is included but lacks explanation and relevant supporting details.
- Less than Satisfactory
6.66 points
Answer to question A is incomplete or incorrect.
- Unsatisfactory
0 points
Answer to question A is not included.
Question B
9 points
Criteria Description
Question B
- Excellent
9 points
Answer to question B is extremely thorough and supported with substantial relevant details.
- Good
7.83 points
Answer to question B is complete and includes relevant supporting details.
- Satisfactory
7.11 points
Answer to question B is included but lacks explanation and relevant supporting details.
- Less than Satisfactory
6.66 points
Answer to question B is incomplete or incorrect.
- Unsatisfactory
0 points
Answer to question B is not included.
Analysis of Firm’s Capital Structure and Impact on Performance (B)
4.5 points
Criteria Description
Analysis of Firm’s Capital Structure and Impact on Performance (C5.1)
- Excellent
4.5 points
An analysis of a firm’s capital structure and its impact on the firm’s performance is extremely thorough and supports with substantial relevant details.
- Good
3.92 points
An analysis of a firm’s capital structure and its impact on the firm’s performance is complete and includes relevant supporting details.
- Satisfactory
3.56 points
An analysis of a firm’s capital structure and its impact on the firm’s performance is included but lacks explanation and relevant supporting details.
- Less than Satisfactory
3.33 points
An analysis of a firm’s capital structure and its impact on the firm’s performance is included but missing key components.
- Unsatisfactory
0 points
An analysis of a firm’s capital structure and its impact on the firm’s performance is not included.
Financial Decisions (B)
4.5 points
Criteria Description
Financial Decisions (C3.1; C9.1)
- Excellent
4.5 points
Recommendations for proposed financial decisions based on analysis of capital structure and capital budgeting techniques are extremely thorough and include substantial supporting details and examples.
- Good
3.92 points
Recommendations for proposed financial decisions based on analysis of capital structure and capital budgeting techniques are complete and include supporting details and examples.
- Satisfactory
3.56 points
Recommendations for proposed financial decisions based on analysis of capital structure and capital budgeting techniques are included but lack explanation and supporting details and examples.
- Less than Satisfactory
3.33 points
Recommendations for proposed financial decisions based on analysis of capital structure and capital budgeting techniques are incomplete or incorrect.
- Unsatisfactory
0 points
Recommendations for proposed financial decisions based on analysis of capital structure and capital budgeting techniques are not included.
Mechanics of Writing
3 points
Criteria Description
Mechanics of Writing (includes spelling, punctuation, grammar, language use)
- Excellent
3 points
Writer is clearly in command of standard, written, academic English.
- Good
2.61 points
Prose is largely free of mechanical errors, although a few may be present. The writer uses a variety of effective sentence structures and figures of speech.
- Satisfactory
2.37 points
Some mechanical errors or typos are present, but they are not overly distracting to the reader. Correct and varied sentence structure and audience-appropriate language are employed.
- Less than Satisfactory
2.22 points
Frequent and repetitive mechanical errors distract the reader. Inconsistencies in language choice (register) or word choice are present. Sentence structure is correct but not varied.
- Unsatisfactory
0 points
Surface errors are pervasive enough that they impede communication of meaning. Inappropriate word choice or sentence construction is used.
Total30 points
