a. "Interest rates are at their lowest point in 50 years, yet the use of debt financing by

corporation is declining- this happens anyway in a recession. And some

deleveraging is due to the increase in business risk. But corporate deleveraging

seems to have gone too far. CEOs are missing valuable opportunities to create

value for their shareholders. In the extreme case you have mature firms who use

no debt at all! Take William Wrigley Jr Company for instance, it has a leading

market share in a stable low technology business- it makes chewing gums- and yet

has no debt. I bet if we could persuade Wrigley Board to do a leveraged

recapitalization through a dividend or major share repurchase, we could create

significant new value."

As one the financial consultants evaluate the above passage on capital structure

and advise the Board of Directors accordingly.

(10 marks)

b. Discuss in detail how are operating leverage, financial leverage and total leverage

related to the income statement?

(10 marks)

c. Does the retained earnings figure on a company's balance sheet indicate the

amount of funds company has available for current dividends or capital

expenditures? Explain fully.