Capital structure decisions.

You have been hired by a firm as an outside consultant to examine their current capital structure
decisions. In doing your research on the firm’s industry, you recognize that the industry in which the firm
operates has substantial uncertainty surrounding cash flows period-over-period. Some periods sales are
outstanding, while other periods are lackluster. Furthermore, the costs of good sold varies substantially
with material input prices being highly uncertain. Given this understanding about the industry in which
the firm operates, how might this affect your recommended level of leverage, all else equal? You do not
need to specific regarding the actual capital structure weights, but given this knowledge would it make
the firm a candidate for a high amount of leverage or a low amount of leverage? Why?

Sample Solution

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