| Course | FAM-5400 Finance and Accounting for Managers |
|---|---|
| Module | Module 6 |
| Paper type | Written assignment 6: capital structure, stocks and bonds |
| Length | About 616 words, 5 pages |
| Format | APA 7 student paper |
| School | Thomas Edison State University |
| Program | Master of Science in Management |
| Updated | October 2026 |
Free sample paper for FAM 5400 Module 6
Debt or Shares for the Second Furnace? Valuation and Capital Structure at Millville Scientific Glass
Student Name
Master of Science in Management, Thomas Edison State University
FAM-5400: Finance and Accounting for Managers
Mentor Name
Month Day, Year
Debt or Shares for the Second Furnace? Valuation and Capital Structure at Millville Scientific Glass
Valuing a Bond
Millville's bond is worth its coupons and principal discounted at the yield lenders now demand. Suppose Millville could place a ten-year bond with a $1,000 face value and a 6.5 percent coupon paid semiannually, and investors require 7.2 percent for its risk. Twenty half-yearly coupons of $32.50 plus $1,000 at maturity, discounted at 3.6 percent a period, are worth about $950.70; the bond sells below par because its coupon trails the yield investors want (Keown et al., 2020). If the required return rose to 7.8 percent, the price would fall to about $910.90, which shows the interest rate risk bondholders bear.
Valuing a Share
Millville's 400,000 shares are family-held, but valuing them matters if outside investors are invited. The company paid $895,000 in dividends in 2025, about $2.24 a share. Millville's $2.24 dividend, growing 4 percent and discounted at 11 percent, values a share at $2.24 × 1.04 / (0.11 − 0.04), roughly $33. The model is sensitive to its inputs: at 10 percent required return the value rises to about $39, which is why investors and the family would likely negotiate around this range.
Two Ways to Fund the Furnace
The two plans give the same earnings per share at an EBIT of about $2.06 million, the indifference point. Above it, debt produces higher EPS because the fixed interest cost is spread over fewer shares; below it, equity does better. Millville's 2025 EBIT was $3.6 million and the furnace is expected to lift it toward $4.5 million, well above the indifference point.
| Debt plan | Equity plan | |
|---|---|---|
| New financing | $6 million loan at 7.5% | About 182,000 new shares at $33 |
| Annual interest | $1,070,000 (existing $620,000 plus $450,000) | $620,000 |
| Shares outstanding | 400,000 | about 582,000 |
| EPS if EBIT is $3.6 million | $4.68 | $3.79 |
| EPS if EBIT is $4.5 million | $6.35 | $4.93 |
| EPS if EBIT is $5.4 million | $8.01 | $6.08 |
Measuring the Risk
EPS alone ignores risk. With contribution margin of about 40 percent, Millville's fixed operating costs of about $11.8 million mean a 1 percent change in sales moves operating income by about 4.3 percent, and break-even sales are about $29.4 million, roughly 77 percent of current sales. Debt adds financial sensitivity on top: at EBIT of $4.5 million, EPS moves about 1.31 percent for each 1 percent change in EBIT under the debt plan, against 1.16 under equity. Interest coverage would fall to about 4.2 times under debt, compared with 7.3 times under equity. A company with high operating sensitivity has less room for financial risk.
What Theory Says
Modigliani and Miller (1958) proved that, absent taxes, bankruptcy costs and unequal information, the mix of debt and equity leaves firm value unchanged. Their result is useful because it identifies what does matter in practice. Interest is tax deductible, which favors debt. Financial distress is costly, which limits it. Millville's family owners know more about the furnace than any outside buyer of shares would, and Myers and Majluf (1984) showed why that gap makes firms reach for retained cash and loans before selling new stock. For a family company, selling shares to outsiders also brings a loss of control and the burden of minority investors.
Recommendation
The debt plan offers higher expected EPS, keeps the family in control and fits the pecking order. Its risk is real but manageable: coverage of about 4.2 times exceeds typical bank covenants, and expected EBIT sits more than twice the indifference point. Millville should finance the furnace mainly with debt, but only after the 2026 budget restores its cash cushion, and it should negotiate a repayment schedule that matches the furnace's expected cash flows.
References
Keown, A. J., Martin, J. D., & Petty, J. W. (2020). Foundations of finance (10th ed.). Pearson.
Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. American Economic Review, 48(3), 261-297.
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187-221. https://doi.org/10.1016/0304-405X(84)90023-0
FAM 5400 Module 6 instructions, in plain terms
FAM-5400's Module 6, Capital Structure: Stocks and Bonds, covers objectives on choosing sources of funds and on capital structure theory and break-even analysis. The paper usually calls for bond and stock valuation, a comparison of financing alternatives and an explanation grounded in theory. Expect EBIT-EPS analysis, measures of operating and financial risk and a recommendation. The figures here are a composite company's; the syllabus places more weight on interpreting results than on the calculations themselves. Expect to value a bond and a share with the textbook's models and to compare debt and equity financing for a project. The project being financed here is a new furnace.
Inside the FAM 5400 Module 6 example
The paper values a bond and a share first, each in a short paragraph with the result and its sensitivity. A table then sets the two financing plans side by side at three levels of EBIT, and the following paragraph explains the indifference point and where expected EBIT falls. A risk section measures operating and financial sensitivity, break-even sales and interest coverage. The theory section moves from Modigliani and Miller to the pecking order, and the recommendation weighs return, risk and control together, with a condition on timing. The recommendation balances the cost of each financing option against the risk it adds. Each valuation shows its inputs and result in a short table.
Reading the FAM 5400 Module 6 grading rubric
Mentors look for each valuation step shown and a furnace financing choice that weighs control and risk as well as cost. Mentors look for correct valuation, a sound comparison of financing alternatives and an explanation that uses capital structure theory rather than EPS alone. Recognizing that operating risk limits how much financial risk a firm should take, and weighing control and signaling for a private company, shows the judgment the module is built to develop. A clear recommendation tied to the analysis completes the paper. Answers that value both securities correctly and explain how the financing choice changes risk for shareholders show the integration the module expects. Valuations that show each step, and financing comparisons that weigh control and risk as well as cost, demonstrate the balance mentors want from a manager's paper.
FAM 5400 Module 6 help from the desk
Capital structure papers lose points for recommending whichever plan has higher EPS without considering risk, for stating Modigliani and Miller's result as if it held in practice and for ignoring control in a private company. Find the indifference point and say where expected EBIT sits. Measure operating and financial sensitivity and coverage. Explain which real-world frictions make capital structure matter. Recommend with conditions where they apply. A free first sample of your own FAM-5400 Module 6 assignment is available on request. State the required return you use for each valuation and where it comes from. Explain what the risk measure means for the owners.
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FAM 5400 Module 6 questions, answered
Where can I find a free FAM 5400 Module 6 sample paper?
The glassware maker's furnace financing paper above values a bond and a share, finds the EBIT-EPS indifference point and recommends debt with theory and risk measures.
How do you find the EBIT-EPS indifference point?
Set EPS under the two plans equal, (EBIT − interest) × (1 − tax rate) / shares for each, and solve for EBIT.
Why does a bond sell at a discount?
Because its coupon rate is below the return investors require, so its price falls until the yield matches that return.
What is the pecking order theory?
Myers and Majluf's pecking order: internal money first, then loans, and new stock only as a last resort, because a share issue hints that insiders think the price is high.
What does the constant-growth dividend model assume?
Dividends rising at one constant rate with no end, and a required return above that rate.