Expert answer:Capital Structure

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Expert answer:How does corporate borrowing increase risks to shareholders and leads to stockholders requiring higher returns?I would like for you to tie/link the increase in investors perceive risk to the firm’s cost of capital in chapter 12.Factors that change required returns affect firm value. Please explain this with either numerical or well-detailed written examplesTiffany Adams and Jessica Weeks are CEO and COO of Tiff-Jess Multi-National Corporation. Tiff-Jess specializes in manufacturing solar-powered bilge pumps. The company wants to expand production. EBIT is projected to be $10,000 if the production expansion is successful. Tiff-Jess is considering whether to finance its expansion on production by selling bonds (debt) OR by issuing equity.Tiff-Jess hires Lin Zhao & Kionte Vinson, a team of Capital Structure business consultant, to help the firm determine which capital structure option to adopt: more equity or more debt.Upon completing some analysis on the firms’ two alternative capital structure options, Lin & Kionte were able to determine that the firm’s EBIT is greater than the indifference point. What expert advice do you think they should proffer to the management team? why?

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