Note on the Theory of Optimal Capital Structure

William E. Fruhan Jr.

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Background Note | HBS Case Collection | February 1979

Note on the Theory of Optimal Capital Structure

by William E. Fruhan Jr.

Abstract

Examines the interrelationship between the maximization of the share value of a firm's common stock and the minimization of the firm's weighted average cost of capital. Presents a revised version of a case by J.W. Mullins, Jr.

Keywords: Capital Structure; Cost of Capital; Stock Shares; Core Relationships; Value;

Format: Print

7 pages

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Citation:

Fruhan, William E., Jr. "Note on the Theory of Optimal Capital Structure." Harvard Business School Background Note 279-069, February 1979.

About the Author

William E. Fruhan

George E. Bates Professor, Emeritus

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Teaching Note | HBS Case Collection | December 2018

The Case of the Unidentified Industries—2018

Mihir A. Desai, William E. Fruhan and Leanne Fan

Teaching Note for HBS No. 219-046.

Citation:
Desai, Mihir A., William E. Fruhan, and Leanne Fan. "The Case of the Unidentified Industries—2018." Harvard Business School Teaching Note 219-047, December 2018. View Details

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Case | HBS Case Collection | December 2018

The Case of the Unidentified Industries—2018

Mihir A. Desai, William E. Fruhan, Jr., Leanne Fan and Adil Bhatia

Citation:
Desai, Mihir A., William E. Fruhan, Jr., Leanne Fan, and Adil Bhatia. "The Case of the Unidentified Industries—2018." Harvard Business School Case 219-046, December 2018. View Details

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Case | HBS Case Collection | June 2018

Burton Sensors, Inc.

William E. Fruhan and Wei Wang

Burton Sensors presents a realistic situation where a small, rapidly growing, and profitable temperature sensor original equipment manufacturer (OEM) reaches its debt capacity and seeks equity financing to sustain high growth. The president of the company must decide whether to purchase thermowell machines (a positive NPV project), whether to issue common stock to a private investor at depressed prices to alleviate financial pressure, and whether to acquire another sensor manufacturer in an all-stock deal. All three decisions are interrelated and require different techniques to assess. In particular, the acquisition decision must be analyzed as both an investment and a financing opportunity, as the acquisition could be used to resolve the financial constraint problem. This case thus shows students how corporate investment and financing decisions often interact. The case offers a comprehensive overview of key issues in a typical corporate finance or financial management course, including capital budgeting, debt capacity analysis, security issuance, and acquisitions. It can be used in a first-year MBA course in corporate finance or financial strategy or in an elective MBA course in mergers and acquisitions. It can also be used in upper-year undergraduate finance courses that cover capital budgeting, security issuance, and mergers and acquisitions. The case can also be used as a take-home final exam.

Keywords: Financing and Loans; Acquisition; Investment; Financial Strategy; Decision Choices and Conditions;

Citation:
Fruhan, William E., and Wei Wang. "Burton Sensors, Inc." Harvard Business School Brief Case 918-539, June 2018. View Details

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Note on the Theory of Optimal Capital Structure

Abstract

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