fin 405 discussion

Using the fundamental principles of financial leverage, discuss how the ratio of debt to equity affects different stakeholders in a proposed merger.

• Calculate the expected value of the high and low risk project to MarCher Industries’ stockholders if the firm remains unlevered. Predict which project the stockholders prefer. Justify your prediction.

• Calculate the expected value of the high and low risk project of MarCher’s stockholders and bondholders, assuming the firm does borrow money to partially finance the purchase of the project. Predict which project the bond holders prefer. Justify your prediction. Predict which project stockholders would prefer. Justify your prediction.