Exam 17: Capital Structure Management in Practice

An analytical technique called ____ analysis can be used to help determine when debt financing is advantageous and when equity financing is advantageous.

Some companies use debt or preferred stock financing instead of common stock financing. The purpose is to ____.

Some firms prefer to use debt or preferred stock for financing to retain control. Explain the rationale behind this method.

The Ames Company has an expected EBIT of $16 million with a standard deviation of $8 million. The indifference point between a debt financing alternative and a common stock financing alternative was computed to be $12 million. Determine the probability that the equity financing alternative will be superior to the debt financing alternative (i.e., have a higher EPS). (Problem requires normal distribution table.)