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Unit 7: Capital Structure Decision

fluctuations in the sales figures specially if the fixed cost instant were very high. Hence, EPS will Notes
fluctuate in such a situation. This effect may be heightened by the financial leverage.

Self Assessment
Fill in the blanks:

13. …………………..denote what has been earned by the company during a particular period
in each of the ordinary shares.
14. A major cause of EPS volatility would be the fluctuations in the sales volume and the
………………..leverage.
15. EPS volatility shows whether a company enjoys a ………………..or not.



Case Study Case: Wishart and Associates — Financial Alternatives

his case provides the opportunity to match financing alternatives with the needs of
different companies. It allows the reader to demonstrate a familiarity with different
Ttypes of securities.

George Thomas was finishing some weekend reports on a Friday afternoon in the downtown
office of Wishart and Associates, an investment-banking firm. Meenda, a partner in the
firm, had not been in the New York office since Monday. He was on a trip through
Pennsylvania, visiting five potential clients, who were considering the flotation of securities
with the assistance of Wishart and Associates. Meenda had called the office on Wednesday
and told George’s secretary that he would cable his recommendations on Friday afternoon.
George was waiting for the cable.

George knew that Meenda would be recommending different types of securities for each
of the five clients to meet their individual needs. He also knew Meenda wanted him to call
each of the clients to consider the recommendations over the weekend. George was
prepared to make these calls as soon as the cable arrived. At 4:00 p.m. a secretary handed
George the following telegram.

George Thomas, Wishart and Associates STOP Taking advantage of offer to go skiing in
Poconos STOP Recommendations as follows : (1) common stock, (2 ) preferred stock,
(3) debt with warrants, (4) convertible bonds, (5) callable debentures STOP. See you
Wednesday STOP Meenda.
As George picked up the phone to make the first call, he suddenly realized that the
potential clients were not matched with the investment alternatives. In Meenda’s office,
George found folders on each of the five firms seeking financing. In the front of each
folder were some handwritten notes that Meenda had made on Monday before he left.
George read each of the notes in turn.
API, Inc
APT, Inc, needs $8 million now and $4 million in four years. Packaging firm with high
growth rate in tri-state area. Common stock trades over the counter. Stock is depressed
but should rise in year to 18 months. Willing to accept any type of security. Good
management. Expects moderate growth. New machinery should increase profits
substantially. Recently retired $7 million in debt. Has virtually no debt remaining except
short-term obligations.
Contd...

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