Premium Essay

Aspeon Capital Structure Case

In: Business and Management

Submitted By kbbb
Words 1460
Pages 6
1.a.) Business risk is the equity risk arising from the nature of the firm’s operating activity, and is directly related to the systematic risk of the firm’s assets. Financial risk is the equity risk that is due entirely to the firm’s chosen capital structure. As financial leverage, or the use of debt increases, so does financial risk and, hence, the overall risk of the equity. Business risk depends on a number of factors, including competition, liability exposure, and operating leverage.

b.) In the total risk sense, one common measure of business and financial risk is the variability of ROE, also known as the standard deviation.

c.) An unlevered firm's beta depends on the firm's business risk, but the use of financial leverage causes the firm's beta to increase. Thus, within a market risk framework:
Total market risk = Business market risk - Financial market risk
d.) Business risk is the single most important determinant of a firm's capital structure. The greater the risk inherent in a firm's assets, then, at any debt level, the greater the probability of financial distress for the firm.

2. a.) ( In the table)
b.) (In the table)
c.) . From the calculations, changing capital structure of the firm increases the risk of the firm so that leveraged firm has a wider range of ROE and a higher standard deviation of ROE .Thus, in the expected(base) case and in the expansion case, leveraged firm has higher returns(ROE) which implies higher profitability.

3.a.) Financial leverage adds risk to the firm’s equity. As compensation, the cost of equity rises with the firm’s risk. R0 is a single point whereas RS, RB, and RWACC are all entire lines.
b.) First of all Aspeon should announce its recapitalization plans to avoid possible lawsuits, then investors would reassess their views concerning the firm’s profitability and risk to estimate a new value for the...

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