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 drug company. This firm makes a unique product that historically generated losses that they still have on their books. But now they have high growth projects coming consistently in the future. Investors are a little concerned on which of the many drug options the firm could choose. The firm has $100 Million in debt and is trading at a MTB multiple of 5X with their market value of equity at $500 Million. b) Your afternoon meeting is with the CEO of a glass producer. They are a mature cash cow with high stable profits. The glass equipment can be used by many other firms. They have Net Income of $79 Million after the 21% corporate tax. They have $100 million in debt paying a 5% interest rate. Their equity value is only trading at $180 Million despite the cash cow profits.
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 drug company. This firm makes a unique product that historically generated losses that they still have on their books. But now they have high growth projects coming consistently in the future. Investors are a little concerned on which of the many drug options the firm could choose. The firm has $100 Million in debt and is trading at a MTB multiple of 5X with their market value of equity at $500 Million.
b) Your afternoon meeting is with the CEO of a glass producer. They are a mature cash cow with high stable profits. The glass equipment can be used by many other firms. They have Net Income of $79 Million after the 21% corporate tax. They have $100 million in debt paying a 5% interest rate. Their equity value is only trading at $180 Million despite the cash cow profits.
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