| Course | GM506 Strategic Financial Analysis |
|---|---|
| Unit | Unit 7 |
| Paper type | Capital structure memo |
| Length | About 980 words, 6 pages double-spaced |
| Format | APA 7 student paper |
| School | Purdue University Global |
| Program | MS in Management |
| Updated | October 2026 |
Free sample paper for GM506 Unit 7
Seventeen Million Dollars and Who Gets a Say: A Unit 7 Capital Structure Memo for a Family Truss Manufacturer
[Student Name]
Purdue University Global
GM506: Strategic Financial Analysis
Unit 7 Capital Structure Memo
[Instructor Name]
[Date]
Haddon Truss and Panel, its owners, the lenders, the investor and every figure are composite and illustrative; the sources cited are real.
To: Haddon family board From: [Student name], Finance Re: How to fund the second plant Date: [Date]
Recommendation
Fund the second plant through a sale-leaseback of its land and building combined with a term loan, and pause dividends for two years. This route keeps the company within its bank covenant, keeps ownership entirely in the family and costs less in control than selling a minority stake.
What Needs Funding
The plant costs $15.5 million to build, and the first year of operation ties up about $1.5 million of working capital, for a total of $17.0 million. Haddon's net debt today is $8.9 million, and its EBITDA in the build year is projected at $6.1 million. The bank's covenant limits net debt to 3.50 times EBITDA.
Three Routes Compared
Route 1, all bank debt. A new $17.0 million term loan raises net debt to $25.9 million, or 4.24 times build-year EBITDA, above the 3.50 times covenant. The bank has said it would require a covenant waiver, a higher interest rate and a personal guarantee from the two family directors. Three years later, as the plant's earnings arrive, the ratio would fall to about 2.6 times. The bank gains a say through tighter covenants and the guarantee.
Route 2, sale-leaseback plus term loan. A real estate investor would buy the plant's land and building as they are completed for $4.8 million and lease them back to Haddon for twenty years at about $420,000 a year, rising 2 percent annually. A $12.2 million term loan covers the rest. Net debt rises to $21.1 million, or 3.46 times build-year EBITDA, just inside the covenant. If dividends are paused for two years, retaining $1.2 million, the ratio falls to 3.26 times. Three years later it would be about 2.2 times. The landlord gains a say over the property but none over the business.
Route 3, minority equity plus a smaller loan. A private investor has offered $8.0 million for a 30 percent stake. With a $9.3 million term loan, including fees, net debt reaches $18.2 million, or 2.98 times EBITDA. Three years later it would be about 1.8 times. The investor gains a seat on the board, approval rights over major decisions and a share of all future profits.
Every route gives an outsider a say; the question is whether that outsider holds a lease on one building, a lien on the company or a seat at the family's table for good.
The Price of the Equity
The investor's offer implies a value for the company. Paying $8.0 million for 30 percent means the company after the investment would be worth about $26.7 million, and before the investment about $18.7 million. Haddon's book equity is $25.4 million. The offer therefore values the business below what the family has invested in it, which reflects the company's falling return on capital and the investor's view of the risk in the new plant. Selling at that price would hand the investor 30 percent of the value the new plant is expected to create, about $2.6 million of the appraisal's $8.6 million, for money the company could raise in other ways.
Why the Order of Preference Matters
Stewart Myers argued that companies tend to finance themselves in a set sequence, retained earnings before borrowing and borrowing before selling shares, partly because outside equity is often priced at a discount that reflects investors' uncertainty about what insiders know (Myers, 1984). The investor's discount here fits that pattern. For family companies there is a further consideration. Research on family-owned firms finds that family control can support long-term performance, partly because families take a long view of investments, but that outside shareholders change the governance dynamics of such firms (Anderson & Reeb, 2003). Bringing in a 30 percent partner would change how the Haddon board makes decisions for as long as the investor holds the stake.
Governance Consequences by Route
Under Route 1, the family keeps full ownership but accepts a covenant waiver, a higher rate and personal guarantees, which put family wealth outside the company at risk if the plant struggles.
Under Route 2, the family keeps full ownership and avoids guarantees, but commits to twenty years of rent on the plant's property. If the plant were later closed, the lease would continue, so the family is betting that the plant will operate for at least the lease term, which the appraisal already assumes.
Under Route 3, the family gives up 30 percent of all future profits, a board seat and veto rights over major decisions such as selling the company or adding plants. Exit terms in the investor's offer allow it to require a sale of its stake after seven years.
The Cost of the Recommendation
Route 2 asks the family to accept a two-year pause in dividends, about $600,000 a year, and a twenty-year lease. Corporate finance texts note that leases are a form of debt and should be counted as such in assessing a firm's financial position (Brealey et al., 2023), so the lease should be included when the board monitors the company's debt ratio. Including lease obligations, the build-year ratio would be closer to 4.0 times, which the bank has accepted under its lease-adjusted calculation as long as the unadjusted ratio stays within 3.50 times.
Decision Requested
The memo asks the board to vote for Route 2 and the dividend pause at its next meeting, so that the leaseback investor and the bank can issue term sheets before construction bids are due.
References
Anderson, R. C., & Reeb, D. M. (2003). Founding-family ownership and firm performance: Evidence from the S&P 500. The Journal of Finance, 58(3), 1301-1328. https://doi.org/10.1111/1540-6261.00567
Brealey, R. A., Myers, S. C., & Allen, F. (2023). Principles of corporate finance (14th ed.). McGraw Hill.
Myers, S. C. (1984). The capital structure puzzle. The Journal of Finance, 39(3), 575-592. https://doi.org/10.1111/j.1540-6261.1984.tb03646.x
What the GM506 Unit 7 assignment asks for
GM506's seventh unit asks for a memo to decision makers on how to fund a project. Put the recommendation in the opening paragraph. State the funding need, the company's current debt, its projected earnings and any covenant that constrains the choice. Compare at least three routes in the same terms: new debt, any lease or rent, the resulting debt ratio in the build year and a few years later, and what each outside party gains a say over. If equity is an option, compute what the offer implies about the company's value and compare it with book value. Use theory sparingly, one or two sentences tied to a figure, such as the order in which firms prefer to raise funds. Address governance consequences route by route. State the cost of your recommendation honestly, including lease obligations. Close with the decision requested. Expect about three pages in memo form, with capital structure research and a textbook on corporate finance in the APA 7 list.
How the GM 506 Unit 7 example is put together
The memo is addressed to the family board and recommends the leaseback route with a two-year dividend pause. The funding section sets $15.5 million of construction and $1.5 million of working capital against $8.9 million of net debt, $6.1 million of build-year EBITDA and a 3.50 covenant. Route 1 reaches 4.24 times and requires a waiver and personal guarantees; Route 2 sells the property for $4.8 million, leases it for twenty years and borrows $12.2 million; Route 3 sells 30 percent for $8.0 million. The highlighted sentence frames each outsider's say. The equity section computes an $18.7 million pre-money value against $25.4 million of book equity and the investor's share of the plant's value. Myers's account of financing order and Anderson and Reeb's study of family firms follow. Governance by route, a lease-adjusted ratio near 4.0 times citing Brealey, Myers and Allen and a decision request close the memo.
Where the points sit in the GM506 Unit 7 rubric
The rubric for this GM506 memo rewards a clear recommendation supported by a consistent comparison. Instructors check that each route is measured the same way, including the covenant ratio in the build year and later. Computing the value implied by an equity offer, and comparing it with book value, earns significant credit because it reveals what the family would give up. Governance consequences should be specific: guarantees, lease terms, board seats and approval rights. Theory should explain a choice in a sentence rather than fill a page. Stating the lease-adjusted debt ratio alongside the covenant figure shows honesty about the recommendation's cost. The memo should end with a decision the board can make. Myers in the Journal of Finance, Anderson and Reeb's study of founding-family ownership and Brealey, Myers and Allen's text provide the sources in APA 7.
GM506 Unit 7 help: mistakes that cost points
GM506 Unit 7 memos often compare funding routes on interest cost alone, missing who gains control or rights over the business. Others recommend equity because it lowers debt without computing what the offer implies about the company's value. A common gap is ignoring the covenant, which can rule out an option entirely. Some writers forget that a lease is a long obligation, presenting a leaseback as if it added no debt. Theory sections often run long. Lead with the recommendation, state the funding need and constraints, compare every route on the same measures, price any equity offer, describe what each outside party would control, include lease obligations in your debt picture, use one or two sentences of theory where they explain a choice and finish by asking the board for a specific vote.
Get a GM506 Unit 7 example written to your instructions
Include your case figures, the lender terms if the case provides them, and the Unit 7 memo prompt and rubric. The first funding memo arrives without charge in 24-48h, recommendation on top, each route costed in one table, and the control each funder gains stated alongside the numbers so control and cost are weighed together. The paper above is an original model document written by our desk, not a submitted student paper and not an official Purdue University Global document.
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GM506 Unit 7 questions, answered
Does a capital structure memo need theory?
A little, used precisely. The trade-off between tax benefits and distress costs, or the pecking order of internal funds, then debt, then equity, can explain why an option is attractive. The memo's reader is a board, though, so theory belongs in one or two sentences tied to a figure, never in a separate literature section.
Should the memo consider family equity?
Yes, if the case gives any sign the owners have funds outside the business. Owner equity avoids new outside parties but concentrates the family's own risk in one market. A single paragraph weighing that concentration, with any figure the case supplies, usually satisfies prompts that ask for a full range of options.
Where can I find a free GM506 Unit 7 sample paper?
This page carries a full GM506 Unit 7 capital structure memo comparing bank debt, a sale-leaseback with a term loan and minority equity for a truss manufacturer's second plant, with debt ratios, an equity valuation and APA 7 references.
What does the equity offer imply about the company's value?
Paying $8.0 million for 30 percent values the company at about $26.7 million after the investment and about $18.7 million before it, below the $25.4 million of book equity the family has built.
Why include the lease when measuring debt?
A twenty-year lease commits the company to fixed payments much like a loan. The covenant excludes it, but adding it back puts build-year debt at about 4.0 times EBITDA, which the board should see alongside the 3.26 covenant figure.