Competition Bikes
Financial Analysis
JET2 Task 3
A1. Capital Structure Recommendation
A sound capital structure needs to be in place for Competition Bikes to maximize its shareholder return and expand. A good capital structure would ensure adequate funding and future business stability. However, adequate funding involves capital financing which also has its own risks. If bonds are issued, the company would have to pay interest on them but if sales projections aren’t met, this could have a huge negative impact on shareholder earnings. Also dividends could be impacted if no shares issued to cover growth or expansion costs because profits will have to be spread among larger number of shares.
To provide a base for analysis in comparing all structures, 5 capital sources have been reviewed as well as the earnings per common share for years nine through 13 were calculated. I will recommend a 50 percent preferred stock and 50 percent common stock capital structure to raise $600,000 required to expand to into Canada. It will maximize investor’s return on investment to highest total earnings per share from year 9 to 13. It will result in to a highest income before taxes because no bond will be due with this structure. After paying the taxes, common shares would yield the highest total income – leading to the highest earnings per common share. This structure also led to the lowest shares issued which is a sign of strength because only common shares are factored into the earnings per common share. This theory is true because given the environment; the lowest number of common shares would have the best earnings per common share
Recommendation Justification:
I will justify my recommendation based on the structures considered in the analysis as follows:
Bonds – 9 percent on bonds was the largest of all options with highest interest payment which helped to lower earnings before taxes. The common stock total income available after paying taxes was the lowest in all 5 five structures.
JET2 Task 3
A1. Capital Structure Recommendation
A sound capital structure needs to be in place for Competition Bikes to maximize its shareholder return and expand. A good capital structure would ensure adequate funding and future business stability. However, adequate funding involves capital financing which also has its own risks. If bonds are issued, the company would have to pay interest on them but if sales projections aren’t met, this could have a huge negative impact on shareholder earnings. Also dividends could be impacted if no shares issued to cover growth or expansion costs because profits will have to be spread among larger number of shares.
To provide a base for analysis in comparing all structures, 5 capital sources have been reviewed as well as the earnings per common share for years nine through 13 were calculated. I will recommend a 50 percent preferred stock and 50 percent common stock capital structure to raise $600,000 required to expand to into Canada. It will maximize investor’s return on investment to highest total earnings per share from year 9 to 13. It will result in to a highest income before taxes because no bond will be due with this structure. After paying the taxes, common shares would yield the highest total income – leading to the highest earnings per common share. This structure also led to the lowest shares issued which is a sign of strength because only common shares are factored into the earnings per common share. This theory is true because given the environment; the lowest number of common shares would have the best earnings per common share
Recommendation Justification:
I will justify my recommendation based on the structures considered in the analysis as follows:
Bonds – 9 percent on bonds was the largest of all options with highest interest payment which helped to lower earnings before taxes. The common stock total income available after paying taxes was the lowest in all 5 five structures.