Managerial Economics & Organizational Architecture 6th Edition by James Brickley , Clifford Smith ,Jerold Zimmerman

Exercise 1

The TRF Company has not fared well with recent increases in foreign competition. Management indicates that it must substantially cut costs to survive. Cost cutting entails dramatic change for the company. TRF had been an all equity firm. Recently, the company borrowed nearly 90 percent of its value and used the money to repurchase shares. The required annual debt payments exceed the company's realized earnings over the past few years. What might have motivated management to make this dramatic increase in leverage, given that it placed the firm in a near "financial crisis "