Question
Consider the Best Circuit Co. problem (#6) from Assignment 4. How would the firm's optimal capital structure change, in terms of a directional change in
Consider the Best Circuit Co. problem (#6) from Assignment 4. How would the firm's optimal capital structure change, in terms of a directional change in the amount of debt, if its growth opportunities were to change as described in the two scenarios, a and b, below? Note: you only need to answer with the directional change in the optimal amount of debt (i.e., increase or decrease), and just as importantly, explain the basis for your answer in terms of capital structure theory.
a. Assume that Best Circuit's management expects numerous profitable growth opportunities, that will require material external funding of new capital investment, to emerge over the next 5 to 10 years and possibly even further out in time.
b. Assume that Best Circuit's management does not expect any profitable growth opportunities, that require material new capital investment, to emerge over the next 5 to 10 years, if ever, at any foreseeable time in the future.
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