Question
QUESTION 4 (25 MARKS) a. Interest rates are at their lowest point in 50 years, yet the use of debt financing by corporation is declining-
QUESTION 4 (25 MARKS)
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.
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