Topic_13_E1 - Topic 13 Exercise 1 Capital Structure and...

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Topic 13, Exercise 1 Capital Structure and Risk of Using Debt On December 2, 2001, the highflying energy firm, Enron, filed for bankruptcy. This is the largest bankruptcy in U.S. history. While the factors that led to the fall of Enron are clearly not limited to use of large amounts of debt in the capital structure, the use of financial leverage was a major factor leading to its demise. The lead story in BusinessWeek's December 17, 2001, issue covered the fall of Enron. After reading the article, answer the following questions: 1. Describe the relative amount of debt that Enron carried directly versus indirectly through off-balance sheet financing. The management of Enron drastically increased the use of debt as a means of accommodating its high level of growth. At the time of its bankruptcy, Enron had $13.1 billion in debt on the parent company's books and an additional $18.1 billion in debt on the books of its subsidiaries. Creditors and rating agencies were aware of this debt. What was not generally known was that Enron had an additional $20 billion in
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