| Course | MT480 Corporate Finance |
|---|---|
| Unit | Unit 9 |
| Paper type | Capital structure memo |
| Length | About 770 words, 5 pages double-spaced |
| Format | APA 7 student paper |
| School | Purdue University Global |
| Program | BS in Business Administration |
| Updated | October 2026 |
Free sample paper for MT480 Unit 9
The Tax Shield Against the Covenant: An MT480 Unit 9 Capital Structure Memo on Funding a $107.5 Million Expansion
[Student Name]
Purdue University Global
MT480: Corporate Finance
Unit 9 Capital Structure Memo
[Instructor Name]
[Date]
Brandywine Hollow Mushrooms, its lender, its figures and every person are composite; the sources cited are real.
Memo Header
To: Chief Financial Officer, Brandywine Hollow Mushrooms. From: Treasury Analyst. Date: November 2, 2026. Subject: How to fund the growing house expansion.
Recommendation
Fund the $107.5 million expansion with about $48.4 million of new notes and about $59.1 million of new equity, a 45 to 55 split. All-debt financing would raise expected earnings per share slightly more, but in a gas-spike year it would breach our loan covenant, and the cost of that breach outweighs the tax benefit.
Earnings per Share Under Each Plan
Expected EBIT next year is $169.30 million. Existing interest on the notes and term loan is about $27.37 million. Under all-debt financing, new notes at 6.5 percent add about $6.99 million of interest, and expected earnings per share are about $2.110 on our 48.6 million shares. Under all-equity financing, issuing stock that nets $30.10 a share adds about 3.57 million shares, and expected earnings per share are about $2.068. The 45 to 55 split gives about $2.086.
The EBIT at which the two pure plans give equal earnings per share is about $129.44 million. Expected EBIT is well above that, so debt raises earnings per share in an ordinary year. But earnings per share in an ordinary year is not the deciding figure.
Both Sides of the Trade
New debt creates a tax shield, because interest is deductible. If the $107.5 million of debt were permanent, the shield would be worth 24 percent of it, about $25.8 million in present value, as Modigliani and Miller (1963) showed for debt in a world with corporate taxes. Over a realistic ten-year term, the shield on $6.99 million a year of interest is worth about $12.06 million discounted at the 6.5 percent borrowing rate.
Debt also raises the chance of financial distress. Our advisers estimate that all-debt funding would raise the probability of distress over the next decade from about 1.5 to about 4 percent. If distress costs about 18 percent of firm value, roughly $2.1 billion, the added expected cost is about $9.43 million. On these figures alone, all-debt funding is still slightly ahead. Myers (1984) describes this as the trade-off between tax benefits and distress costs that sets a firm's target debt level.
The Deciding Figure
The deciding figure is the covenant. Our term loan requires net debt to stay below 3.5 times EBITDA. Expected EBITDA is about $235.5 million. In a gas-spike year, like the one that nearly broke the winter contract in Unit 1, EBITDA falls about 38 percent, to about $146.01 million. With all-debt funding, net debt would be about $559.2 million after our $38.3 million of cash, 3.83 times EBITDA, above the limit. With the 45 to 55 split, net debt would be about $500.1 million, 3.43 times EBITDA, inside the limit.
In an ordinary year all-debt funding wins by four cents a share; in a gas-spike year it breaches the loan agreement.
A covenant breach would give the lender the right to call the loan or raise its rate at the worst moment, exactly when gas costs had drained cash. The distress probability above does not capture this specific, foreseeable trigger. Graham and Harvey (2001) found that finance chiefs weigh flexibility and their credit rating more heavily than interest deductions when they choose how much to borrow, which is the priority this memo applies.
What We Give Up
The split gives up about $0.024 of expected earnings per share in an ordinary year and about half of the potential tax shield. It also dilutes existing shareholders by about 1.96 million new shares. In exchange, the company keeps its covenant intact in the scenario we can see coming.
Timing the Equity Issue
Selling about $59.1 million of new shares should follow the expansion's approval rather than precede it, so that investors see the project's value case, and the issue should be sized after the first gas contract for the winter is priced, since a hedge would allow a smaller equity share. Underwriting costs are already reflected in the $30.10 net price.
Conditions
The recommendation holds if gas-spike years remain about as likely and as severe as the last decade's. If the grower hedges a large share of next winter's gas, the spike scenario softens and more debt becomes safe; the memo should then be revisited.
References
Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60(2-3), 187-243. https://doi.org/10.1016/S0304-405X(01)00044-7
Modigliani, F., & Miller, M. H. (1963). Corporate income taxes and the cost of capital: A correction. The American Economic Review, 53(3), 433-443.
Myers, S. C. (1984). The capital structure puzzle. The Journal of Finance, 39(3), 574-592. https://doi.org/10.1111/j.1540-6261.1984.tb03646.x
The Purdue Global MT480 Unit 9 instructions
MT480 Unit 9 asks for a memo recommending how a company should finance a project, debt, equity or a mix. Put the recommendation first. Compare earnings per share under each plan and find the break-even EBIT. Then price both sides of the trade-off: the value of the interest tax shield and the expected cost of financial distress. Many of the strongest memos then test a specific downside scenario against loan covenants, because a covenant breach is a concrete, foreseeable cost that general distress estimates miss. State what the recommendation gives up, such as earnings per share or tax savings. Add conditions under which the answer would change, and any practical matters such as the timing of an equity issue. About three pages with one comparison table is common, addressed to the finance chief and written so the first paragraph stands alone.
How the MT 480 Unit 9 example is put together
Brandywine Hollow's memo opens with a two-sentence recommendation for a 45 to 55 split. Earnings per share under all-debt, all-equity and the split are compared, and the break-even EBIT is shown to sit well below expected EBIT. The trade-off section values the tax shield two ways, citing Modigliani and Miller, and estimates the added distress cost, with Myers on the trade-off. The deciding section applies a gas-spike year to the term loan's net-debt covenant, under a highlighted line contrasting four cents a share with a breached agreement, and cites Graham and Harvey on flexibility and ratings. A section states what the split gives up in earnings, tax savings and dilution. Another sets the timing and size of the equity issue around the winter gas contract. Conditions close the memo, naming a gas hedge as the change that would justify more debt.
Where the points sit in the MT480 Unit 9 rubric
Capital structure memos are graded on whether the recommendation rests on the right evidence. Instructors credit an earnings per share comparison and break-even EBIT, but strong memos show that these favor debt in ordinary years and do not settle the question. Valuing the tax shield and distress costs shows understanding of the trade-off theory. Running a bad year through the loan covenants tends to earn the most credit, since it makes distress risk specific. Stating what the recommendation gives up shows honesty. Conditions that would change the answer, tied to a manageable risk such as hedging, show practical judgment. Memo format with the recommendation first suits a finance executive. Classic capital structure research should support specific points.
MT480 Unit 9 help: mistakes that cost points
Weak Unit 9 memos pick borrowing on the strength of higher per-share earnings alone. Another frequent problem lists pros and cons of debt in general terms without numbers. Students often value the tax shield as permanent when the debt has a term. Distress costs are commonly ignored or estimated without a basis. Covenants are rarely checked, though they are often the binding constraint. Before submitting, run your downside scenario through every covenant in the company's loan agreements and report the ratio under each financing plan. If one plan breaches a covenant, that result probably belongs near the top of the memo. Then state plainly what your recommended plan costs in ordinary years, so the finance chief can weigh it.
Get an 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. 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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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.
Where can I find a free MT480 Unit 9 sample paper?
This page carries the complete MT480 Unit 9 memo comparing debt and equity for a composite mushroom grower's $107.5 million expansion, with a covenant test.
Why does the MT480 Unit 9 sample reject all-debt financing?
In a gas-spike year net debt would reach 3.83 times EBITDA, breaching the 3.5 covenant, while a 45 to 55 split stays at 3.43.