When the Bell System was originally broken up, the old AT&T was split into a new AT&T plus seven regional telephone companies. The specific reason for forcing the breakup was to increase the degree of competition in the telephone industry. AT&T had a monopoly on local service, long distance, and the manufacture of all the equipment used by telephone companies, and the breakup was expected to open most of these markets to competition. In the court order that set the terms of the breakup, the capital structures of the surviving companies were specified, and much attention was given to the increased competition telephone companies could expect in the future. Do you think the optimal capital structure after the breakup should be the same as the pre-breakup optimal capital structure? Explain your position.

AppendixLO1