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Capital Structure Decision and the Cost of Capital - Essay Example

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Capital Structure Decision and the Cost of Capital

About These Firms Headquartered in California USA, eBay Inc. is an online auction website that was started in September 2005. You can buy almost anything on eBay, but it has to be legally admissible and not dangerous or restricted items. People bidding for items on eBay can use auction price listings, fixed price format or fixed price format with best offer. Presently eBay operates in around 30 countries. When it went public in September 2008, the price went up to $53.50 from $18.00 on the opening day of the IPO offer. As of 14 February 2012, the stock price of the eBay company (EBAY) was $32.89 and its market capitalization was 42.39 billion. It has a beta of 1.29. The Clorox Company is headquartered in Oakland, California and is best known for its Clorox bleach product that is a mixture of mainly chlorine and sodium hydroxide. The company was formed in May 1913 by a group of five entrepreneurs from different professions who decided to set up a commercial scale liquid bleach factory in the USA. Originally concentrating on industrial grade bleach, the founders nevertheless decided to create a less potent form of the bleach for household use in 1917, and sales skyrocketed. The FTC prevented a takeover bid from Procter & Gamble in 1957 from being successful due to monopoly and antitrust laws and Clorox was again made independent in 1967. In its quest for expansion and diversification, the company has experimented with everything from bottled water to beauty and cosmetics, but is still best known for its cleaning products such as Glad, Liquid Plumr, Formula 409, Pinesol, SOS and Tilex. As of 14 February 2012, the stock price of the Clorox Company (CLX) was $67.96 and its market capitalization was 8.83 billion. It has a beta of 0.7. Founded in 1968 in Lakeland, Florida by William Darden, Darden Restaurants operates and owns a chain of around 1800 restaurants mainly in the USA. However the franchise has expanded to Canada as well, having about 35 outlets there. Its casual dining themed restaurants include among others the Red Lobster, Olive Garden and Long Horn Steakhouse labels. Lacking the funds for further expansion, Darden had sold the chain to General Mills in 1970, but the purchaser rewarded him by placing Darden as President of the newly acquired business when the headquarters moved to Orlando. He was subsequently promoted to VP of Operations while the first Restaurant Manager, Joseph R. Lee assumed the position of President of Red Lobster. As of 14 February 2012, the stock price of Darden Restaurants (DRI) was $48.66 and its market capitalization was 6.25 billion. It has a beta of 0.41 (Yahoo Finance Website, 2012). Ratios and Financial Data Looking at the Yahoo Finance website, it appears that eBay earned revenues of $11.65 billion in 2011. Its profit margin was 27.72 percent, while ROA was 6.01 percent and ROE was 19.43 percent. When it comes to the Clorox Company, revenue earnings were $5.31 billion in 2011. The profit margin was 10.45 percent, while ROA was 13.47 percent and ROE figure was not available. Taking the Darden Restaurant figures, this chain earned revenues of $7.74 billion in 2011. Darden’s profit margin was 5.80 percent, while its ROA was 7.89 percent and the ROE stood at 25.08 percent. Of course, though on the face of it, a comparison would make eBay the best of the three in terms of revenues earned, with Darden second and ...Show more


Finance Module 4 Case Assignment Name of the Writer Name of the Institution Capital Structure Decision and the Cost of Capital Introduction The capital structure decision relating to the mixture of debt and equity for a company has important financial consequences…
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Capital Structure Decision and the Cost of Capital
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