This case draws on morerfoi from Chapters 16' and I 5?. Maria Suarez returned to her office after spending the afternoon meeting with her firm's investment bankers. Suarez was CFO of Midco Industries, a midsized manufacturing rm, and she was taking a hard look at its capital structure and pavout policy. Suarez felt that Midco was underievered and potentially not taking full advan- tage of the tax benefits of debt. Further complicating matters, Midco*s institutional investors had been clamoring for either a repurchase or a special dividend. One possibilityI oated by her investment bankers was a "leveraged recap," in which Mideo would issue debt and use the proceeds to repurchase shares. Mideo Industries has 20 million shares outstanding with a market price of $15 per share and no debt. The firm has had consistently stable earnings and pays a 35% tax rate. Midco's investment bankers proposed that the firm borrow $1 million on a permanent basis through a leveraged recap in which it would use the borrowed funds to repurchase outstanding shares. As Suarez sat down at her desk, she stared at her notepad. She had written down several questions that she would need to answer before making her decision