2. Describe briefly Intel’s current capital structure. Discuss whether in your view this capital structure is optimal for Intel, with particular emphasis on the pros and cons of Intel’s substantial cash holdings. Articulate and defend a “target” capital structure for Intel. Cee
As shown in the financial income statement (Exhibit3), Intel Corp. (INTC) has a capital structure consisting most of equity. Intel has very little debt in its capital structure and the cost of debt would have only a marginal effect on the overall cost of capital. The current capital structure of Intel is not optimal yet since optimal capital structure is making minimum weighted-average cost of capital.
Portion of Equity and Debt:
Long term debt = 363 = 363/4781 = 7.59%
Common Equity =4418 = 4418/4781 = 92.4 %
Cost of Capital:
Cost of debt =interest expense/long term debt = 29%
Cost of Equity =
Since Intel has very large cash balances ($2.4billion), Intel can decrease WACC by using cash disbursement through the following alternative.
1.) Market repurchase program
2.) Issue put warrant
When firm repurchases stock, it will reduce amount of shareholder. Therefore it will reduce common equity proportion in B/S.
Due to the fact that cost of equity is higher than cost of debt ( you may need to show the calculation ) , Therefore, if the proportion of equity is reduced, it will definitely reduce in WACC.
Issuing the put warrant will have the same result as re purchasing stock, but there will be the risk that company can not buy stock back if Intel price is higher then the exercise price by next two years. Because one who holding put warrant will not find any benefit for exercising warrant ( Not sure na for this comment, but you can show the stock price trend for Intel to say something like Hey.)
but you can show the stock price trend for Intel to say something like Hey.. SEE ... for trend in next two years...
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