A finished FIN-450 Topic 8 board financing recommendation example, comparing debt, equity and a mix for a plant, testing each in a downturn and recommending the mix. Searches like "fin 450 topic 8 assignment example", "fin450 topic 8 sample" and "fin-450 topic 8 example" land here.
What a finished FIN-450 Topic 8 board financing recommendation looks like
The finished memo works with illustrative figures in millions. Operating profit is 150 before the plant and 190 with it, existing debt is 200 at 6 percent, and 60 million shares trade at 25. Borrowing all 300 at 7 percent gives earnings per share of about 1.96; issuing 12 million shares gives about 1.85; a mix of 150 in debt and 6 million new shares gives about 1.90. All three break even at operating profit of 138. The memo then tests a repeat of the last downturn, which would cut operating profit to about 120 and EBITDA to 170. All-debt financing would leave interest covered 3.6 times and debt at 2.94 times EBITDA, past the 2.5 the case treats as the limit for the current rating. The mix stays near 2.06, and the memo recommends it.
How a FIN-450 Topic 8 example is structured
The memo's first paragraph gives the recommendation, the mix, and the condition under which the board should choose all debt instead. A background section describes the plant, its expected contribution and the firm's current financing, all case figures. The comparison section computes earnings per share under each option and the operating profit at which they break even, with the arithmetic shown. A downturn section applies the last recession's decline to the new profit level and recomputes coverage and leverage for each option. A rating paragraph explains why losing the current rating would raise the cost of all future borrowing, not just this issue. The objections section answers two questions directors will ask: why accept lower earnings per share than all debt offers, and why sell shares at 25 if management thinks they are worth more. It ends on the results that would justify revisiting the choice in a year.
Recommendation and its reversal condition
The recommendation comes first and says that all debt would be preferable only if the board expects operating profit to stay above 150 through any downturn.
Earnings per share under three options
All debt gives about 1.96, all equity about 1.85 and the mix about 1.90, and the three break even at operating profit of 138.
A downturn applied to each option
A repeat of the last recession takes operating profit to about 120, where all-debt coverage falls to 3.6 times and the mix holds at 5.3.
The rating as a cost of flexibility
Debt above 2.5 times EBITDA would put the current rating at risk, and a lower rating raises the cost of every later borrowing, not only this one.
Two objections answered in advance
The memo explains why a small sacrifice in earnings per share buys downturn capacity, and why issuing at 25 is reasonable when management values the shares near that price.
Evidence that would reopen the choice
A year of plant results above plan, or debt paid down below 2 times EBITDA, would justify replacing part of the new equity with borrowing.
Where marks go in FIN-450 Topic 8
Recommending the option with the highest earnings per share, and stopping there, is the failure boards and graders both catch, since that figure says nothing about what happens when profit falls. Papers that compute earnings per share without the break-even level cannot tell the board when the ranking reverses. A recommendation grounded in textbook theory alone, ignoring this firm's downturn history and rating limits, describes no firm in particular. Ignoring what an equity issue signals, or treating it as costless, leaves out the objection directors raise first. Leverage measured only at expected profit overstates the firm's capacity in exactly the year it matters. Memos that bury the recommendation after pages of arithmetic, or omit the condition that would reverse it, leave directors without a decision to vote on.
Get a FIN-450 Topic 8 example written to your instructions
Send the FIN-450 Topic 8 instructions and your classroom rubric, with the firm and project case your section provides. We write a custom example to them, with the recommendation stated first, earnings per share and break-even computed, each option tested in a downturn, rating limits applied and directors' objections answered, in 24 to 48 hours. The first one is free.
FIN-450 Topic 8 questions, answered
What is an EBIT-EPS break-even point?
The level of operating profit at which two financing options give the same earnings per share. Above it, the option with more debt gives higher earnings per share because fixed interest is spread over fewer shares; below it, the equity option does better. In the example all three options break even at 138. Knowing that level tells a board how far profit could fall before the debt-heavy choice stops paying off.
Why does issuing equity worry directors?
Partly because outside investors know managers issue shares more willingly when they think the price is high, so an announcement can push the price down. Issuing also spreads future earnings across more shares. The memo addresses both: it states management's own estimate of value relative to 25 and argues that the capacity preserved in a downturn is worth more than the small reduction in earnings per share.
Can the memo guide a real company's financing decision?
No. The firm, the plant, the downturn and the rating threshold are illustrative, chosen so the trade between earnings per share and flexibility is visible. A real financing decision depends on audited results, actual market terms, rating agency analysis and the board's risk tolerance, and it involves qualified financial advisers. The memo demonstrates the board-ready recommendation FIN-450 closes on, as coursework rather than investment advice.