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Summary GB550 Unit 5 Assignment.docx Unit 5: Moore Plumbing Supply Company Capital Structure GB550: Financial Management Purdue University Global Questions 1.What is meant by capitalization? What is meant by a firms capital structure? For financial plann$4.99
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Summary GB550 Unit 5 Assignment.docx Unit 5: Moore Plumbing Supply Company Capital Structure GB550: Financial Management Purdue University Global Questions 1.What is meant by capitalization? What is meant by a firms capital structure? For financial plann
GB550 Unit 5 A Unit 5: Moore Plumbing Supply Company Capital Structure GB550: Financial Management Purdue University Global Questions 1.What is meant by capitalization? What is meant by a firms capital structure? For financial planning purposes, explain why either book or market value shou...
gb550 unit 5 assignmentdocx unit 5 moore plumbing supply company capital structure gb550 financial management purdue university global questions 1what is meant by capitalization what is
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Running head: GB550: Financial Management | Unit 5
Unit 5: Moore Plumbing Supply Company Capital Structure
GB550: Financial Management
Purdue University Global
, GB550: Financial Management | Unit 5 2
Questions
1. What is meant by capitalization? What is meant by a firm’s capital structure? For
financial planning purposes, explain why either book or market value should be used to
determine the firm’s capital structure. What is capital structure theory?
Capitalization is when a firm assesses and maximizes its capital structure. Thus, we need an
understanding of capital structure to continue. Capital structure of a company is in reference to
the firm’s equity. So, Capitalization is vital to a company’s success because, all business strive to
maximize their value.
In order to determine value, there are two options book value and market value. Both can be used
in order to justify the value of a company’s stock. Book values is the company’s worth after
liquidation of assets and liabilities paid. The market value of a company its based on its stock
value in the public market. As market value is the firm’s ability to produce profit its weighted
heavier in the decision-making process from investors however both come to play a part in
determination of value.
Capital structure have different forms and variations depending on the industry under review.
This is when capital structure theory comes into a light of its own. “Capital structure theories are
studies that examine the factors that cause these differences” (Brigham & Ehrhardt, 2019). Two
examples of capital structure theories are the Modigliani and Miller models.
2. Discuss the following issues relating to business risk and financial risk.
a. What is the difference between business risk and financial risk? Explain some of
the factors that contribute to each. Evaluate Moore Plumbing Supply’s level of
business risk.
“Business risk and financial risk are integrated to reach a total rick of a company’s future
return on equity”(Brigham & Ehrhardt, 2019). Business risk is when a firm does not
generate enough capital to cover operational expenses. Financial risk occurs when a
firm’s capital is insufficient to cover the leans against the firm. A firm running debt free
can operate free from the financial risk however business risk is unavoidable as
operational expenses are required to generate product or services to receive payment.
The Moore Plumbing company currently sits with three quarters of its outstanding equity
being held by the Moore family. This is a result from Stan’s focus of short-term debt
operations sustaining the company. To grow the company and optimize the WACC of
Moore Plumbing Tom is going to have to change tactics. Acquiring a long-term debt to
finance the expansion and expand the company operations.
b. How do these risks relate to total risk?
Total risk defined by Brigham and Ehrhardt (2019) “Total risk is a combination of
business risk and financial risk”. Business risk is an important attribute to keep in mind
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