Addressed to a chief financial officer, this MT480 Unit 9 memo prices the tax shield on 107.5 million of new borrowing against a covenant breach in a gas-spike year. Searches like "mt 480 unit 9 assignment example", "mt480 unit 9 sample" and "mt480 unit 9 example" land here.
What a finished MT480 Unit 9 capital structure memo looks like
Three pages with one comparison table. All debt at 6.5 percent lifts expected earnings per share to 2.110 dollars, against 2.068 for all equity at a 30.10 net issue price, and the break-even EBIT sits at 129.44 million, well below the 169.30 million expected. The memo then prices both sides of the trade. New debt shields 24 percent of its interest: 25.8 million in present value if permanent, 12.06 million over a ten-year term. Distress probability rising from 1.5 to 4 percent, at a cost of 18 percent of firm value, adds 9.43 million of expected cost. The deciding figure is the covenant. A gas-spike year cuts EBITDA 38 percent to 146.01 million, pushing all-debt leverage to 3.83 times against a 3.5 limit. The 45/55 split holds at 3.43.
How a MT480 Unit 9 example is structured
Two sentences of recommendation lead the memo, 48.4 million of new notes and 59.1 million of new shares, so the reader has the answer before the evidence. A background paragraph restates the current mix, about 23 percent debt at market value, and the covenant capping net debt at 3.5 times EBITDA. The comparison table follows with three columns, all debt, all equity and the split, and rows for interest, earnings per share, coverage and leverage in a normal year and a spike year. The next section sets the tax shield against expected distress cost and admits both rest on estimates. A paragraph on the spike year, drawn from Unit 5's 35 percent combined probability of a gas spike, explains why the covenant rather than the tax arithmetic decides. Risks and a review trigger close it.
Forty-five percent debt, stated up front
Borrow 45 percent of the 107.5 million and raise the rest in shares, keeping spike-year leverage under the covenant with about 0.07 turns to spare.
Where debt wins on paper
Expected EBIT of 169.30 million sits far above the 129.44 million indifference point, so debt gives the higher earnings per share in an ordinary year.
Shield against distress
A 25.8 million permanent shield outweighs 9.43 million of added expected distress cost, which the memo concedes before explaining why that comparison does not settle it.
The winter that decides
In a gas-spike year, interest coverage falls to 2.32 times under all debt and leverage breaches the 3.5 limit; under the split it holds at 3.43.
Earnings per share in a bad year
At a spike-year EBIT of 79.81 million, below the indifference point, all-equity financing gives 0.764 per share against 0.711 for all debt.
When to revisit
The memo proposes retiring part of the new notes early if two normal winters pass, or issuing more equity if gas supply contracts fail to renew.
Where marks go in MT480 Unit 9
Memos that argue from earnings per share alone, recommending debt because it raises the expected figure, miss the half of the assignment named in its prompt. The distress side needs a number or at least a mechanism, and in this case the mechanism is a covenant that a single bad winter could trip. Tax shields claimed at the full 107.5 million times the rate, without saying that the figure assumes permanent debt, overstate the benefit and draw comment. An indifference EBIT computed but never compared with expected EBIT wastes its own work. Recommendations buried on page three, in a genre that exists to be read quickly, lose presentation points under most rubrics. Memos that score well state the answer, show the trade-off in one table, and name the condition that would change the recommendation.
Get a MT480 Unit 9 example written to your instructions
Send your Unit 9 case figures or the assigned company's name, the rubric, and who will read the memo. Its recommendation comes first, financing mixes share a single table, and the tax shield is weighed against a specific distress mechanism. Your first custom sample is free and is normally ready in 24-48h.
MT480 Unit 9 questions, answered
Why not choose all debt if the tax shield is larger than the distress cost?
Because the expected-cost arithmetic averages over outcomes, and the covenant does not. A 35 percent chance of a gas-spike year is not remote, and a breach would hand lenders the right to reprice or accelerate the debt at the worst moment. The memo treats that as a constraint to satisfy first, then takes as much debt as the constraint allows.
Where does the 18 percent distress cost come from?
It is an assumption within the range finance texts commonly cite for the direct and indirect costs of financial distress, and the memo labels it that way. The recommendation does not rest on it; the covenant test drives the choice. Stating which inputs are estimates, and which conclusions survive if they change, is a habit most rubrics reward.
Should the memo discuss the Modigliani and Miller theorems?
Briefly, if your section covered them. The sample uses one sentence: without taxes and distress costs, the financing mix would not change firm value, so what the memo must do is weigh those two frictions. Longer theoretical discussion usually belongs in a paper rather than a memo, and the audience here is a chief financial officer with a decision to make.