The decision regarding finding the optimum mix of equity and debt capital depends on capital spending, expected returns, optimum levels of debt, liquidity, cash levels, interest rates and risks, and dividend policy (Mallicoat, 2011). The following is a snapshot of the possible Capital Structures that Competition Bikes Inc. could acquire while expanding to Canada. The following were the alternatives available while choosing the right Capital Structure mix: 1. Capital Structure consisting only of bonds 2. A capital structure consisting of only stocks, with 50% preferred and 50% Common Stock 3. With 20% bonds and 80% common stock 4. Capital Structure consisting of bonds of 40% and Common Stock 60% EPS (Earning Per Share) is the portion of company’s profit that is allocated to each share of the common stock. It is the most important measure or figure for any shareholder. However, we would analyze the capital structure not only according to the EPS but also analyze the risk inherent in the capital structure. The first alternative of the capital structure comprising only of bonds would allow the company to borrow capital at an interest rate that is lower than the interest rate for other types of borrowing. Bonds are written promises to pay back specific amount at a certain date and some interest payments at specific rates. They are pretty similar to the conventional loans with a few perks. Debt financing is favorable than equity financing as interest expense is tax deductible. However, one problem with this form of capital structure is that it is more risky as corporations are required to make interest payment even when they are not making profits making them vulnerable to bankruptcy and solvency (Brown, 2006). The EPS of this capital structure is also lowest at -0.042 under the current scenario. Hence, having the capital structure completely rely on bonds is a very risky option, specifically for Competition Bikes Inc. when they are expanding and exploring new opportunities. The second alternative is of 50% preferred stock and 50% common stock. Preferred stock offer dividend incentive to the shareholder as they are second in line to be paid after the bond holders when a company is facing a loss making them more risky than the common stock. Common stocks are favorable for companies with good financial health. However, the risk of losing ownership is inherent in common stocks as stock holders have the right to elect the board of directors. Moreover, equity financing is more expensive than debt financing and it is not feasible for a capital structure to be totally based on it (Other ways of raising capital – stocks and bonds, 2011). Therefore, the Capital Structure must include both debt and equity financing. All the third, fourth and fifth alternatives are mix of equity and debt financing. We need to find the right kind of mix between equity and debt. As debt is more risky and equity is more expensive and the objective of the company’s capital structure is to maximize shareholder return, we can decide on the basis of Earning per Share (EPS). EPS is the earning of each outstanding share. An important aspect of EPS is the capital required to generate the income used in the calculation of EPS. As all our Capital Structure alternatives use the same amount of capital, we can decide on the basic of the highest value of EPS while keeping the risk factor under check. Since Competition Bikes Inc. is expanding in Canada, they need time before they can start making large
Recommendations of Capital Structure A corporation’s capital is divided into two forms of capital: equity and debt capital. A combination of both of these types in different percentages is known as capital structure. The combination percentages depend on a number of factors…
The purpose of this research is to investigate the following: profitability ratios, liquidity ratios, asset management ratios, capital structure and gearing ratios, current scenario, pro-forma income statement, pro-forma balance sheet, assumption: external financing need (EFN), sustainable growth rate and internal growth rate
o evaluate the investments of different projects and compare between them so as to chose the right project for investment. There are various capital budgeting techniques namely Net Present Value analysis, Internal Rate of Return, Payback Period Method and Profitability Index Method.
Once a financial performance analysis has been done, then the company can move on to make investment decisions. Thus, financial performance analysis helps in facilitating decision making in an organization. This paper evaluates the financial performance of Gentiva Health Services Company.
The company showed growth in their 13th year with an increase in Sales Moreover, the administrative expenses of the company constitute less than 20% of sales showing that the company is operating efficiently and the selling expenses are also in the range of 10% of sales continuously during all these years.
This report provides the comparison of operating leverage, cost of capital and financial leverage. Operating Leverage: In general, the higher the operating leverage, the more an organization’s profits. It is also influenced by variation in sales volume.
These considerations include tax advantages, investors’ requirements, risk of bankruptcy, and cost of capital among many others. The issues that are established in the analysis are used to make recommendations on the most suitable capital structure and payout policy.
Financial Analysis: Apple Inc. (2012) Introduction The fiscal situation of companies is expounded through the use of financial instruments such as balance sheets and income statements. Various forms of financial instruments are utilised in order to configure how shifts in the company’s assets and liabilities would affect the company’s accounts (Helfert 40).
At the realm of the table is the head of merchandise. The subordinate heads include various merchandise managers such as the one for Fragrance and accessories. Another one is the person in charge of skin care for men. There is also the Body Hair Care. The last of
is among the largest amusement park operators in the world and has its operations in Canada and United States. It has eleven amusement parks, five hotels, one indoor water park, and three outdoor water parks. All of its parks are family-oriented, and their
Capital budgeting is important for several reasons. First, when making the decision to procure assets, managers are required to forecast the revenue of the assets over their lifetime. Second, provided with the duration of the organization’s projects, capital budgeting decisions eventually define the organization’s strategic plan.
10 pages (2500 words)Term Paper
Hire a pro to write a paper under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger
Apply my DISCOUNT
Got a tricky question? Receive an answer from students like you!Try us!
Let us find you another Term Paper on topic Financial Analysis of Capital Structure for FREE!