FIN 571 Week 5 DQs

Discussion Questions

What are some reasons why subordinated debt is typically rated lower than senior debt?

The development of the new issue junk bond market had important implications for capital structure choice. The existence of a viable junk bond market means that firms can comfortably maintain higher degrees of leverage than they could prior to the development of this market. Do you agree or disagree? Justify your answer.

What are the principal advantages and principal disadvantages of lease financing? Which of the purported advantages are really of dubious value?

Because the weighted average given in Equation (17.4) is always a correct measure of a required return, why do firms not create securities to finance each project and offer them in the capital market in order to accurately determine the required return for the project?

If your company is publicly traded, review your company's most recent audited balance sheet and calculate its debt/equity ratio. If your company is not public, choose a public company in your industry and calculate its most recent debt/equity ratio. Now assume you need to raise funds in the amount of 40% of the stockholders' equity reported on the balance sheet for the company. Identify the possible reasonable alternatives for fundraising and assess the impact each would have on the balance sheet and the debt/equity ratio.

Think about leases. Is leasing an alternative in your company? If so, what do you lease? Does your company lease big machines, or small things like copiers? What do you think are viable leasing options?