Hi, could you please assist with this question? You are an investment banking consultant advising an...

Hi, could you please assist with this question?

You are an investment banking consultant advising an investment company. The CEO of the company tells you that she believes that capital structure does not have an impact on firm value. On what basis might they make this comment? State whether you agree or not with this position and explain why. Does the nature of this firm’s business risk change your answer? Fully explain your reasoning.

Expert Solution

Since this is an investment company,the capital structure of this company will be highly impactful because this company will need to have optimum mix of equity capital and capital so that it will help the company in maximizing the shareholders return but it will also help the company in not liquidating the investments, because it will have to pay off its debt repayment.

Investment companies are generally taking money from the various investors for the purpose of the investment and their needed to make a rate of return for their investors and they always charge commission in respect of the investors, but their capital structure is also important because there are other operational charges as well, and if the company is not able to meet with the charges, it will have to liquidate the investment so, the existence of the company would be in danger, and I think that investment company should also be having an optimum mix of debt capital and equity capital in order to maximize the rate of the return and minimise risk and inflate the value of shareholders in the long run.

jeff jeffy answered 1 year ago

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