I have to answer the question below in 450 words. I have been reading the chapter and don't fully understand this question:
In order to decide an optimal capital structure, we first look at the current capital structure of Time Warner. Currently Time Warner has long term debt of $37,616,000 and total equity of 42,288,000 (source http://finance.yahoo.com). At the moment debt percentage is 37,616,000/(37,616,000+42,288,000) = 47% and so equity is 53%. If we look at the industry figures, the debt to equity ratio for the industry is 0.50 (source: http://moneycentral.msn.com) which translates to a debt ratio of 33% and equity ratio of 66%. In relation to the industry, Time Warner uses more debt. We now look at the cash flows of Time Warner and the ability of Time Warner to service the debt. In 2008 Time Warner ...
The solution explains how we can devise an optimal capital structure for Time Warner.