1. How much leverage, if any, would you recommend that Tonka assume?

2. Is the toy industry competitive? Why?

3. What is Tonka’s strategy? How effectively has this strategy mitigated any of the toy‑industry risks? How well has Tonka performed under this strategy?

4. How was case Exhibit 12 derived? What is the quid pro quo for these gains in value?

5. Where do we come out on this?

6. How would you try to convince Tonka’s management to adopt your recommended policy? 

The case presents the financial and strategic positions of the sixth-largest U.S. toy manufacturer, Tonka, as of early 1987. At that time, Tonka carried virtually no debt on its balance sheet, in sharp contrast to the other major toy manufacturers. Based on competitive and financial considerations, the student is challenged to recommend a capital‑structure policy for the firm.

The case was developed to motivate a discussion of the determinants of corporate debt policy. Of a possibly long list of determinants, this case highlights two:

(1) The value‑creating benefits of debt tax shields

(2) The need for financial slack (excess cash and unused debt capacity) as dictated by the firm’s competitive position. The case is usefully paired with “Coleco Industries, Inc.” (Case 60), which also considers debt policy and illustrates the costs of financial distress.