Question 4-Optimal Capital Strucrure

7/27/2019 Question 4-Optimal Capital Strucrure

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Question 4

The traditional theory of capital structure is that the optimal capital structure exists, where the WACC is

minimised and market value is maximised. (Arnold, 2005)

The traditional approach argues that a moderate degree of debt can lower the firms overall cost of

capital and thereby, increase the firm value. The initial increase in the cost of equity is more than offset

by the lower cost of debt, but as debt increases, shareholders perceive a higher risk and the cost of

equity rises until a point is reached at which the advantage of lower cost of debt is more than offset by

more expensive equity. (Pandy, 2005)

However, the contention of the traditional theory, that moderate amount of debt in sound firms does

not really add very much to the riskiness of the shares, is not defensible. Also, there is insufficient

justification for the assumption that investors perception about risk of leverage is different at different

levels of leverage.

In the traditional view of capital structure, it is also argued that investors do not always have the

information and/or the time needed to closely monitor changes in the level of debt relative to equity.

Consequently there is a period of time where the expected return or required return on the levered

firms stock does not fully account in the M&M sense for the added financial risk that is associated

with the higher levels of debt. (Grant, 2002)

Modigliani and Miller (1958) studied the capital structure theory intensely and from their analysis, they

developed the capital structure irrelevance proposition. Their approach is opposite to the traditional

approach. Essentially they hypothesized that in perfect markets, it does not matter what capital

structure a company uses to finance its operations. They say that there is no relationship between

capital structure and cost of capital; and changing the capital structure would have no effect on the

overall cost of capital and market value of the firm.

Modigliani and Miller argued that it would not be possible for one company to remain more valuable

than another, since the overvalued company would be bought and sold until the prices equalise.

However, M&Ms hypothesis relies on a few assumptions: capital markets are perfect (information is

costless, no taxes, no transactions costs) so the imperfections need consideration.


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The M&M capital structure irrelevance proposition assumes 1) no taxes and, 2) no bankruptcy costs.

Taking these assumptions into consideration, the WACC should remain constant with changes in the

company's capital structure. For example, no matter how the firm borrows, there will be no tax benefit

from interest payments and thus no changes/benefits to the WACC. Additionally, since there are nochanges/benefits from increases in debt, the capital structure does not influence a company's stock

price, and the capital structure is therefore irrelevant to a company's stock price. (Graham and Harvey,

2001)

However, in the real world, taxes and bankruptcy costs do significantly affect a company's stock price. In

additional papers, Modigliani and Miller included both the effect of taxes and bankruptcy costs.

In 1963, when Modigliani and Miller admitted corporate tax into their analysis, their conclusion altered

dramatically. As debt became even cheaper (due to the tax relief on interest payments), the cost of debt

fell significantly. Thus, the decrease in the WACC (due to the even cheaper debt) was greater than the

increase in the WACC (due to the increase in the financial risk). Thus, WACC falls as gearing increases.

Therefore, if a company wishes to reduce its WACC, it should borrow as much as possible.

There is clearly a problem with Modigliani and Millers with-tax model though, because companies

capital structures are not almost entirely made up of debt. Companies are discouraged from following

this recommended approach because of the existence of factors like bankruptcy costs, agency costs andtax exhaustion. All factors which Modigliani and Miller failed to take in account. (ACCA, 2009)

The traditional approach assumes that there are benefits to leverage within a capital structure up until

the optimal capital structure is reached. The theory recognises the tax benefit from interest payments.

Studies suggest, however, that most companies have less leverage than this theory would suggest is

optimal.

In comparing the two theories, the main difference between them is the potential benefit from debt in a

capital structure. This benefit comes from tax benefit of the interest payments. Since the M&M capital-

structure irrelevance theory assumes no taxes, this benefit is not recognised, unlike the traditional

theory, where taxes and thus the tax benefit of interest payments are recognised.

On reflection by the author, the traditional view appears to be a more worthwhile approach to achieving

optimal capital structure. In the absence of perfect capital markets and the existence of corporate taxes,


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M&Ms theory is more unrealistic to real life situations. It has been suggested that some firms are

financed entirely by equity, but very few firms are financed entirely by debt, and neither of these

observations are consisted with the M&M theory.

Term structure of interest rates

Definition of 'Term Structure Of Interest Rates'

The relationship between interest rates or bond

yields and different terms or maturities. The term

structure of interest rates is also known as a yield

curve and it plays a central role in an economy.

The term structure reflects expectations of

market participants about future changes in

interest rates and their assessment of monetarypolicy conditions.

Investopedia explains 'Term Structure Of Interest

Rates'

In general terms, yields increase in line with

maturity, giving rise to an upward sloping yield

curve or a "normal yield curve." One basic

explanation for this phenomenon is that lenders

demand higher interest rates for longer-term

loans as compensation for the greater risk

associated with them, in comparison to short-


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term loans. Occasionally, long-term yields may fall

below short-term yields, creating an "inverted

yield curve" that is generally regarded as a

harbinger of recession.

What It Is:

Thetermstructure of interest rates, also called theyield curve, is a graph that plots the yields of similar-

qualitybondsagainst theirmaturities, from shortest to longest.

How It Works/Example:

Thetermstructure of interest rates shows the various yields that are currently being offered onbondsof

differentmaturities. It enables investors to quickly compare the yields offered on short-term, medium-

term and long-term bonds.

Notethat the chart does not plotcouponrates against a range of maturities -- that graph is called

thespotcurve.

The term structure of interest rates takes three primary shapes. If short-term yields are lower than long-

term yields, the curve slopes upwards and the curve is called a positive (or "normal") yield curve. Below

is an example of anormal yield curve:

If short-term yields are higher than long-term yields, the curve slopes downwards and the curve is called

a negative (or "inverted") yield curve. Below is example of an inverted yield curve:
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Finally, a flat term structure of interest rates exists when there is little or no variation between short and

long-termyieldrates. Below is an example of aflat yield curve:

It is important that only bonds of similar risk are plotted on the same yield curve. The most common

type of yield curve plots Treasury securities because they are considered risk-free and are thusabenchmarkfor determining the yield on other types ofdebt.

The shape of the curve changes over time. Investors who are able to predict how term structure of

interest rateswillchange can invest accordingly and take advantage of the corresponding changes

inbondprices.
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Term structure of interest rates are calculated and published by TheWall StreetJournal, the Federal

Reserve, and a variety of other financial institutions.

Why It Matters:

In general, when thetermstructure of interest rates curve is positive, this indicates that investors desire

a higherrate of returnfor taking the increased risk of lending theirmoneyfor a longer time period.

Manyeconomistsalso believe that a steep positive curve means that investors expect strong future

economic growth with higher futureinflation(and thus higher interest rates), and that a sharply

inverted curve means that investors expect sluggish economic growth with lower future inflation (and

thus lower interest rates). A flat curve generally indicates that investors are unsure about future

economic growth and inflation.

There are three central theories that attempt to explain whyyieldcurves are shaped the way they are.

1. The "expectations theory" says that expectations of increasing short-term interest rates are what

create a normal curve (and vice versa).

2. The "liquiditypreference hypothesis" says that investors always prefer the higher liquidity of short-

termdebtand therefore any deviance from a normal curvewillonly prove to be a temporary

phenomenon.

3. The "segmentedmarkethypothesis" says that different investors adhere to

specificmaturitysegments. This means that the term structure of interest rates is a reflection of

prevailinginvestmentpolicies.

Because the term structure of interest rates is generally indicative of future interest rates, which are

indicative of aneconomy's expansion or contraction, yield curves and changes in these curves can

provide a great deal of information. In the 1990s, Duke University professor Campbell Harvey found

thatinverted yield curveshave preceded the last five U.S. recessions.

Changes in the shape of the term structure of interest rates can also have an impact on portfolio returns

by making somebondsrelatively more or less valuable compared to other bonds. These concepts are

part of what motivateanalystsand investors to study the term structure of interest rates carefully
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Cost of raising equity

in November 2008, Donn Flipse was forced to close one of his three flower superstores in Florida's

Broward and Palm Beach Counties. Nine months later, Flipse expanded by acquiring the business of a

retiring florist in a wealthy section of South Miami. Those two events normally would have led Flipse to

lean on his $500,000 line of credit. But that credit line had been personally guaranteed by a familymember who, because of a decline in that person's own finances, was unable to continue the guarantee.

Flipse paid off the revolving loan with "the only thing available"money from two of his grown children,

both of whom are shareholders and sit on the company's board. Now, for the first time in its 19-year

history, Field of Flowers, which employs 46 people and expects to bring in $6 million in sales this year,

doesn't have bank financing.

Like thousands of other small business owners with good credit histories, Flipse also found his credit-

card companies lowering his limits. He plans to pay back his kids in early 2010, after the Valentine's Day

and Easter rushes bail him out. "There was no choice," he says. He recently had to lay off two of six

headquarters employees, leaving the dispatcher running the computer system. "We're not thrilled about

any of it. But the company's a part of our lives."

It's not news that small companies are scrambling for credit, or in some cases, for equity investors.

Entrepreneurs even appear to have caught a much weaker strain of the same virusleveragethat

helped bring down Lehman Brothers and many individual homeowners. From 2003 to 2008 the liabilities

of small companies ballooned from roughly equal to sales to three times sales, according to Sageworks,

a financial data company that tracks 1 million small private businesses. "In the crazy times, people werelike drunken sailorsthey'd project that in two years they'd double their earnings, [so they would]

overvalue their companies, and as owners in love with their businesses, take on debt, right or wrong,"

says William Lenhart, national director of business restructuring at BDO Consulting, which advises

companies with $10 million to $15 million in sales. "They got away from the historical debt-to-equity

parameters of their industries." Banks and credit-card companies did their part, too, heedlessly throwing

offers of credit at entrepreneurs. Some 636 million business credit-card offers went out in 2007,

according to Packaged Facts, a research group. That works out to about 27 offers mailed to each

company in the U.S.

Now, morning-after realities are prompting a rethinking of the relative merits of debt vs. equity. A rising

sense of conservatism says small companies should be far less leveraged than was thought prudent 18

months ago, and should have much more generous debt-service coverage ratios. This measurement is a

favorite among bankers because it cuts to the chase: Will they get paid or not? "There's a weeding

process going on," says Joseph Harpster, chief credit officer at Herald National Bank, a New York

community bank. "Banks have to be more careful." There's also a shift in thinking about a company's


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optimal debt-to-equity ratio, or its level of debt compared to shareholder equity. Instead of financing to

expand, it's now about stashing away cash and trying to stay solvent.

Some business owners say ratios are an accountant's problem. That's not smart, says Dileep Rao,

president of Minneapolis' InterFinance Corp, a venture-finance consulting firm, and professor at the

University of Minnesota's Carlson School of Management. "Running your business without knowing your

numbers is like driving a car without being able to see your direction or speed," says Rao. "It's only a

matter of time before you crash."

The terms "debt" and "equity" get tossed around so casually that it's worth reviewing their meanings.

Debt financing refers to money raised through some sort of loan, usually for a single purpose over a

defined period of time, and usually secured by some sort of collateral. Equity financing can be a

founder's money invested in the business or cash from angel investors, venture capital firms, or, rarely,a government-backed community development agencyall in exchange for a portion of ownership, and

therefore a share in any profits. Equity typically becomes a source of long-term, general-use funds. The

share of any hard assets, such as property and equipment, that you own free and clear also counts as

equity.

Striking the right balance between debt and equity financing means weighing the costs and benefits of

each, making sure you're not sticking your company with debt you can't afford to repay and minimizing

the cost of capital. Choosing debt forces you to manage for cash flow, while, in a perfect world, taking

on equity means you're placing a priority on growth. But in today's credit markets, raising equity may

simply mean you can't borrow any more.

Until recently, bank credit was a financing mainstay. But experiences like Flipse's underlie a point made

by the Federal Reserve Board's quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices,

released in November. According to loan officers, small-company borrowers were tapping sources of

funding other than banks. They were being driven away for many reasons. Banks "continued to tighten

standards and terms...on all major types of loans to businesses," though fewer were doing so than in

late 2008, when tightening was nearly universal. Interest rates on small business loans were on the riseat 40% of the banks surveyed, even as the prime rate reached historic lows. One in five banks had

reduced small companies' revolving credit lines. One in three had tightened their loan standards, and

40% had tightened collateral requirements. Partly because of the plunging value of the real estate

securing many commercial loans, pressure from bank examiners for tighter standards continued to

build. Meanwhile, home equity loans, another popular source of small business cash, had evaporated.

Many recession-weary business owners knew they had essentially become unbankable: Loan officers


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surveyed said far fewer firms were seeking to borrow. Those few who could borrow were repelled by

higher rates. All of a sudden, equity financing looked better.

But equity has other costs besides giving up some control of your company. Raising equity involves legal,

accounting, and investment banking fees, which eat up at least three to five percent of the amount

raised. Later, investors will want a regular stream of information. And the lower your company's

valuation, the more equity you'll give up to raise the same amount of cash, so raising this type of

financing in a company's early stages means selling more of the business.

How much debt, and how much equity, is right for your company? Benchmarks vary by industry. And

stripped of context, they don't mean much. Fast-growth fields with potential for blockbuster returns,

such as software and biotech, attract equity investors more easily. Those companies also are often

unable to borrow because their assets are intangible and their cash flow uncertain. The result: debt-to-equity ratios near zero. Capital-intensive industries with high costs, such as oil and gas development,

construction, and mining, tend toward high debt-to-equity ratiossometimes as high as 10 to 1. The

same high ratios can hold for banks and finance companies, as well as troubled industries, such as

airlines and autos. Here are some other factors that affect the optimal ratio for an individual company.

THE STAGE YOUR BUSINESS IS INAre you growing? That's hard to do using internal cash flow alone. "If

you don't have some debt, you're probably constraining your growth," says John Terry, a business

professor at the SMU Cox School of Business. "Most often, a viable business needs cash to grow, unless

you choose to grow very slowly." How much debt is too much?

If a company is stable and well-established, tipping toward debt financing makes sense, because the

company has both assets to borrow against and the cash flow to service the loans. Fast-growing

startups, by contrast, lack the assets and cash flow that would qualify them as borrowers; they must

inevitably tilt toward equity financing, which has a downside. "The cost of equity capital, where you're

selling off a piece of your business, tends to be double" that of debt financing, says Tom Kinnear,

professor of entrepreneurial studies at the University of Michigan's Stephen M. Ross School of Business.

From that average, it regularly goes far higher, says Rao. In other words, the profits you're giving upfrom the portion of the company you no longer own can be expected to be much greater than the

interest you would pay on a comparable loan. "That's a reasonably sophisticated calculation that's not

widely understood," says Kinnear. The good news about equity is that going bankrupt because of

mushrooming debt is not a concern. The bad news is that peace of mind comes at the cost of ownership

and control. A demanding investor's desire for a particular exit strategy may not coincide with an

entrepreneur's best interest. A newly launched business, however, may have no better choice.


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INDUSTRY NORMS FOR ASSETS, INVENTORY, AND RECEIVABLESThese vary, depending on the type of

business. If you're a manufacturer and your equipment is valuable, it's relatively easy to secure working

capital backed by those assets. Also, banks as well as asset-based lenders will make loans against

accounts receivable and certain types of inventory. Typically, they'll lend 60% to 80% of the value ofreceivables that are less than 90 days old, and sometimes, 30% to 50% of the value of raw or finished

inventory. Fair warning: Interest rates at asset-based lenders will typically be at least two or three times

the prime rate, and your credit score may play a part, too.

Industry norms also vary when it comes to solvency ratios. Again, asset-rich manufacturers with plants,

equipment, and inventory that can be liquidated are well positioned for debt financing, while service or

Web companies are less so, says venture investor Michael Gurau, president of Coastal Enterprises

Community Ventures, which runs two regional venture funds in Portland, Me. But any company with

large receivables, whatever its industry, should seek some debt financing, particularly a working capital

line of credit, he believes.

COMPARING DIFFERENT FORMS OF FINANCINGBorrowing isn't cheap right now, but it is at least

accessible. The variety of vehicles include subordinated or "junior" debt (so named because it has only a

secondary claim on assets in the event of a bankruptcy). These loans come at higher interest rates, but

they're available from development agencies and others. Factors and asset-based lenders may be

options for distressed companies, where the owner's personal credit rating is below 650 and the

company's net worth is negative. Higher-risk or startup borrowers that anticipate a merger or initialpublic offering within eight years can explore "venture debt" and similar hybrid structures that couple a

loan with a "kicker" that converts to equity. But there aren't many venture bankers around, and the

most establishedSilicon Valley Bank, Western Technology Investmentare in Silicon Valley.

Alternative financing may also take the form of a vendor leasing program, which Flipse uses: He leases

his delivery fleet from a trucking company that provides financing at 5%.

As for possibilities on the equity side, it's sometimes feasible for companies or owners to create their

own nest eggs. Pilar Pea is co-owner, with her twin sister, Ali, and her mother, Alex, of 10-year-old

Forums Event Design & Production, a $2.5 million, five-person Miami company that uses a network offreelancers to put on expos, conferences, and other bilingual sales and training meetings across Latin

America and the Caribbean. Recently the Peas' credit-card company canceled the business' revolving

credit, claiming their $150,000 balance was too close to the limit. But when the bank conducts its annual

scrutiny of Forums' $200,000 credit line, the Peas are prepared. Besides owning residential property,

they build capital by keeping half the company's net income in the business each year. They run lean,

with just two full-time employees besides the family. "If you've left enough equity in the business and


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have financial discipline in your life, you have that backup," Pilar says. "We have our back against the

wall, and it gets scary" every spring, she explains, during and after a $1 million conference for a client

that takes 60 days to pay. She pushes hard on receivables and uses a factor, but the equity is the

emergency fund: "It's something that will pull you through." The bank says the Peas may only approach

their line's limit once a year, when they're bankrolling that huge event.

YOUR GOALS"The real question may not be how much you raise or borrow, but where are you putting

that money? There's good debt and bad," says James Montgomery, a small business lawyer. "Borrowing

money to generate more moneythat's good debt. Borrowing just to stay alive is not."

One goal might be to stay ahead of rivals. If you keep expenses low and raise only a minimal amount, a

better-funded rival may pass you. It's a calculation Michael Kirban made with Vita Coco, the coconut

water company he co-founded with Ira Liran in 2004 . On vacation in Brazil, they were struck by thepopularity of coconut water. With $80,000 in savings and a $100,000 credit line, they began importing

small quantities, which Kirban sold to Manhattan grocers and delis, making the rounds on in-line skates.

Rivals were on the scene, but Kirban was ahead in sales and distribution and wanted to stay that way. In

2007, he won $7 million in equity funding, for a 20% stake, from Verlinvest, a fund created by the three

founding families of European beer conglomerate Anheuser-Busch InBev. That allowed him to build a

factory in Brazil that employs 30 and to raise sales to $20 million.

WHEN AN EQUITY INVESTOR OFFERS MORE THAN CASHSome venture capital firms can help a business

gain credibility by supplying advice, access to customers, and a stamp of approval. Kirban says his

investor does this, too. Verlinvest "is a perfect fit," Kirban says. "We wanted an investor-partner with in-

depth knowledge of the beverage business on a global scale." It seems to be working: Verlinvest has

given guidance to Vita Coco's marketing team, which has allowed the young company to start selling in

the United Kingdom. Verlinvest also suggested a set of quantitative benchmarks that Vita Coco uses to

gauge its progress.

But at the beginning, Kirban was reluctant to part with a majority of his company, which Verlinvest

originally wanted. Now, although Verlinvest has a 30% stake, it also has a significant say on all employeeremuneration and the ability to replace Kirban at any time. Kirban, for his part, is thrilled to have such a

big player in his corner.

SIZE OF MONTHLY LOAN PAYMENTSJust a few years ago, you may have heard this praise sung in favor of

debt: You can deduct the interest payments at tax time. That's still true. But now, burned by the


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downturn, bankers and entrepreneurs are turning their attention to a different issue: Can you safely

project that you'll have enough free cash flow to service that debt without spiraling downward,

especially if interest rates rise? Credit analysts use a figure called the debt-service coverage ratio, which

measures whether you've borrowed more than you can make monthly payments on. Ray Silverstein, a

board member of Devon Bank in Chicago, says he's looking for $1.50 of free cash flow to be available

each month for every dollar of debt-service payments that come due. Others seek $1.20. That compares

with just $1 a few years agoand that $1 was often based on cash-flow assumptions that were, shall we

say, highly optimistic. Do this calculation not only at current interest rates but at higher rates as well, in

anticipation of increases. Then consider possible fluctuations in revenue and in your ability to collect on

time from your customers.

Still, some people just don't like to owe money. When Kirban was funding Vita Coco with his line of

credit, he had nightmares. "Every time I'd open up our Citibank account and see how much debt we had,

I'd freak out," he says. "When we were maxed out and had very little in the bank, you believe in your

business, but stillit's scary to be personally liable for it." He paid it down as soon as he found an equity

partner.

Where does that leave us? Prevailing wisdom today holds that debt and equity should be equal (1:1)or

that equity financing should be twice that of debt (1:2). Compare that with 2007, when the acceptable

level of debt, relative to equity, was twice or even four times what's acceptable today, says Steve

Romaniello, managing director of Atlanta private equity firm Roark Capital Group.

In the end, a ratio is only an analytical tool, not a magic wand. Important pieces of the puzzle, such as

interest rates or sales, can move in unpredictable directions. Or as Rao says: "An optimally financed

business may be obvious only in hindsight."

Cost of raising equity vs cost of raising debt (answer)

It's usually a question of not either or but rather a question of the optimal mix of debt vs equity. Acompany's optimal capital structure is a fairly complex analysis but in general a company analyzes the

risk and reward between debt vs. equity with the goal of maximizing the company's stock price. Every

company establishes a target capital structure (% of debt vs. % of equity) which may change over time

based on the company's current capital structure, future expected capital raising needs, tax position,

expected need for financial flexibility etc. Generally, when a company's debt ratio is below the

predetermined optimal target % companies typically raise new capital by issuing debt...when the debt


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ratio is above their optimal target % they typicaly raise capital by issuing equity. The advantages of

issuing debt are primarily that the interest is tax deductible which lowers the effective cost of the debt

and stockholders don't have to share the profits of the business with debtholders. The main

disadvantages are when a company's debt ratio increases to the point where the associated risk makes

future borrowing too expensive and therefore reduces a firms capital flexibility...it can also lead to

bankruptcy due to the fixed cost of servicing the debt in an otherwise healthy company.

Investor Appetite

hat is risk appetite?

Kavita Sriram, TNN Apr 27, 2008, 02.54am IST

Investors often hear of the maxim, 'greater the risk, greater the reward'. Risk tolerance is the level of

comfort with which a person takes risk. What exactly is this risk and how does it effect an investor's

decision?

Shyam decides to buy stocks of a company. His friend had mentioned casually that the company was

expected to do well. Shyam immediately placed an order, readily lapping up risk on the little known

stock. But Ram was cautious. What if the stock did not perform as well as predicted by some people? He

was not going to rely on hearsay. He gathered information. Ram is yet unsure if he should make the

phone call and place the buy order.

Shyam and Ram are two investors who are by nature extremely different. Shyam is aggressive, while

Ram is not. The two have different levels of risk appetite. Their behavior is in line with their appetite to

consume risk. Still other investors may altogether shy away from the markets at these turbulent times.

The willingness of an investor to hold a risky asset varies.

Investors despise uncertainty. Risk appetite, risk aversion and risk premium is often used in place of the

other. However, there are some finer nuances that distinguish one from the other. Some people take

higher risks. In other words, they are willing to lose more until they get the expected returns. A person

who can stand all his money getting eroded has a greater risk appetite. Risk appetite can be defined as

the willingness of an investor to bear risk.

Risk-averse persons exhibit reluctance to accept a bargain with an uncertain payoff. He would instead be

content with a deal that is more certain, but possibly with lower-than-anticipated returns. An investor is

said to be risk-averse if he prefers less risk to more risk In between the two behaviors of risk aversion

and risk seeking is a state called risk neutrality. One who is indifferent to risk is risk-neutral.


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Risk premium is the return in excess of the risk-free rate of return that an investment is expected to

yield. It can be construed as the reward for holding a risky investment rather than a risk-free one.

An investor's appetite for risk decreases with age. A young unmarried investor may be quite aggressive.

This is simply because he has not much financial commitment and has many more working years ahead

of him. Even if he loses he can earn more.

On the other hand, an investor in his retirement years has to be more cautious. He cannot take high risk

because he is dependent on the returns. He cannot afford to lose his investments. His need for money is

far greater with inflation and day-to-day expenses. A middle-aged man will invest mostly in equity, while

judiciously setting aside some funds for fixed instruments and retirement savings.

An investor must first understand his risk appetite. Once he comprehends it, he must invest in

instruments accordingly. A high-risk investor has mostly equity instruments in his portfolio. A low-risk

investor concentrates on fixed income sources. In the middle path are investors with medium-risk

tolerance.

They can have a mix of equity and debt in their portfolio. Take for instance the balanced funds, offered

by many fund houses. Aimed at such investors, they have a balanced mix of both high risk and low risk

instruments.

Corporate risk appetitie

Documents

Question 4-Optimal Capital Strucrure