Every business requires some source of funds to maintain operation and competitive advantages. Whether it’s a manufacturing or servicing firm, it requires financing. Financing sources can be obtained through debt, bond issuance, bank loan, equity, and issuance of preferred and/or common stock. The amount of debt and equity builds the firm's capital structure. The firm's corporate or business strategy is the proportion of capital structure it needs to finance its operation. The combination of debt and equity totals the cost of capital for the firm. The cost of capital is the weighted average of each capital source fund. The cost of capital is known as the, Weighted Average Cost of Capital (WACC). The WACC includes many factors as profitability, credit worthiness, debt history, and other finance factors. WACC gives a firm a benchmark to where it should receive any gain. Since firms are continuously trying to improve its infrastructure, business processes, or competitive priorities, WACC is heavily utilized in capital…
This assignment is in TWO parts, with each part carrying a maximum mark of 50%.…
The Armstrong Production Company is an industry-leading firm in the field of manufacturing synthetic building materials for homes and commercial structures, based near St. Louis. Armstrong was fortunate in its initial stages to quickly secure inexpensive funding in the form of developmental loans issued by the State of Illinois, and thus was able to break even within three years of its founding in the early 1970s. Able to pour resources into its research and development segment, riding on the increasing demand for construction materials from the 1970s to 1980s, and issuing 15 million shares for the company in an initial public offering (20% of this is currently owned by the board of directors, with another 13% controlled through the company’s employee stock ownership plan). Armstrong Production was able to greatly expand without incurring an overwhelming amount of debt. Following the stock issue, debt composed only 10% of the firm’s capital structure, with equity (that is, money earned from issuing stocks and retaining earnings in the company) composing the rest.…
The course project involved developing a great depth of knowledge in analyzing capital structure, theories behind it, and its risks and issues. Before I began this assignment, I knew nothing but a few things about capital structure from previous unit weeks; however, it was not until this course’s final project that came along with opening doors for me to developing a real understanding of why capital structure is important, what to expect from it, and how to evaluate in determining value of a firm. For the first time, various financial statements were closely examined and retrieved via online including Google, MSN, and Yahoo and an extensive amount of research were referred to in order to ensure quality in the project and report any findings that may be relevant to this research. One of the most stimulating part about this assignment was that we were allowed to select a firm of our interest and it was not until this project that I’ve came to suddenly realize there is plentiful amount of information available to enrich us to knowing more about how and why the values are placed about in a firm which convinced me enough to feel that this was the main reason why I selected this assignment to be included for my program portfolio.…
The Debt/Equity ratio of the company is as low as 0.02%. This ratio is negligible and it can be said that it is almost an all equity company. Because of such a capital structure of the company, it gives the signal of a safe investment. The risk associated with the company will be low and hence it will be able to raise additional debt as well as equity with reasonable ease. However, we suggest that the company can take the benefit of financial leverage by raising debt in case of future capital requirements. It is outstanding that the company has huge Reserves and Surplus and hence they can fund projects through Internal Equity.…
Diageo was created when Grand Metropolitan, plc and Guiness, plc merged in 1997. While the Diageo name is not well known to consumers, its brands are among the most famous including Guinness, Smirnoff, Johnnie Walker and Cuervo. The company recently decided to focus on a strategy to grow through its spirits, wine and beer businesses and divest of its Pillsbury and Burger King subsidiaries. This case study will focus on the proposed capital structure decisions of Diageo.…
1. Companies U & L are identical in all respect except that U is unlevered while L is levered. Company L has Rs. 20 Lacs of 8% debentures outstanding. Assume…
The Patni Computer Systems Ltd. (Patni) was incorporated on 10th February 1978 under the Companies Act 1956. The company converted itself from a private limited company to a public limited company on 18th September 2003. It is now a leading IT consulting services and business solutions provider in India. The majority of the services offered are in the fields of insurance, manufacturing, retail, telecom etc. It has over 12,500 professionals building up a strong team, with 23 sales and marketing offices internationally and many offshore development centres across eight cities in India. The company’s clientele has increased from 199 as of December,31st 2005 to 272 as of December,31st 2009.…
b 2. The proposition that the value of the firm is independent of its capital structure is called:…
The capital structure for a company can be very important for the success of the company. Many aspects of the business must be evaluated in order to determine the appropriate capital structure. Throughout this paper, three companies will be evaluated. The three companies being evaluated are eBay (NasdaqGS: EBAY), The Clorox Company (NYSE: CLX), and Alaska Air Group Inc. (NYSE: ALK).…
The electronic private automatic branch exchange (EPABX) is equipment that has made day-to-day working in the offices much simpler, especially in the area of communication.…
Market Value of the Firm, Market Value of Equity, Return Rate on Capital and the Optimal Capital Structure…
I s there a way of dividing a company’s capital base between debt and equity that can be expected to maximize fi rm value? And, if so, what are the critical factors in determining the target leverage ratio for a given company? Although corporate fi nance has been taught in business schools for more than a century, the academic fi nance profession has found it diffi cult to come up with defi nitive answers to these questions. Part of the diffi culty stems from how the discipline has evolved. For much of the last century, fi nance education was a glorifi ed apprenticeship system designed to pass on to students the accepted wisdom—often codifi ed in the form of rules of thumb—of successful practitioners.…
Bibliography: ❖ Debt and capital structure to measure the financial risk in company’s long-term capital structure. (FTC, 2008)…
Javed Siddiqui* M. Zillur Rahman** Abstract: Prior studies in capital structure have attempted at establishing relationships between profitability and level of gearing. This study attempts at presenting a comparison of capital structures between MNCs and local blue chip companies enlisted with the DSE. The study concludes that the level of gearing used in MNCs are significantly lower than the level of debt used by their sectoral local counterpart companies, although the MNCs have a higher tangibility ratio. The study also finds that the debt-equity ratio of local companies and MNCs are almost similarly negatively correlated with profitability.…