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Capital Structure

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Mini Case Capital StructureAt his desk Thomas takes small sips of coffee and shuffles meditatively through the folder in front of him He arrived at work in a good mood this morning as he was anticipating concluding a large project he has been struggling with in the past three months And then before he could even take off his coat a senior VP dropped a huge folder on his desk and briefly asked Thomas to give a presentation at the end of the day today Thomas new quest was to find the best way to finance the firms newest venture idea an apps store targeting the service industry The project is to be analyzed separately from the firms present business as a new startup Despite the casual introduction and the short deadline Thomas figured right away that this was not a straightforward question and now a bit flooded by all the data in front of him was trying to overcome his slight unease and get to work From the proforma Thomas found out that the total amount necessary to start this project was forecasted at 4 million with anticipated yearly earnings before interest and tax of 11 million The money could come from debt equity or most likely a mixture of the two Similar projects financed entirely with equity were generally considered to have a beta of 3 and were taxed at 35 General calculations in the folder were using a riskfree rate of 2 and an expected market return of 6 As a new an
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