3. 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 highly profitable publisher. Their current profits stem from a series of popular books on the US Presidency that saved the company from the previous losses that still serve as tax loss carry forwards. While the new approach does generate many growth opportunities for the firm, many perceive this political move as a big gamble. Nonetheless the CEO tells you that their stock trades at very healthy multiples that he fears he will not be able to justify.

b) Your second meeting is with a retail grocery chain. They do not have excessive growth potential but instead generate profits that have historically been very stable and are expected to continue that way. Their EBIT has been between $40-45 million every year for the last ten years with very few competitors in the horizon. Their assets mostly consist of the buildings, general equipment and inventory. They want your advice on whether they should add to their $50 Million in debt paying interest of 4% on average.