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 cosmetics company.This firm has taken some time to get going and still possesses some tax loss carry forwards.But customers have really taken to their unique products and now they are generating great profitability and have very attractive growth opportunities in the pipeline.Nonetheless, investors are concerned that the CEO could switch into a range of investments, some of which could be quite risky.

b)

Your afternoon meeting is with the CEO of a rubber producer.They are a mature company that uses rubber-making equipment that they have been using for quite some time.This equipment is mostly fully depreciated but still is working effectively.Pro-forma analysis of their cash flows show them to be quite stable with the following current values: EBIT is $50 million and the interest rate on debt is 5% on a $1 billion in debt.Investors do not see this business as an attractive one in the modern world but the CEO truly believes that they are undervalued.