Assignment:
The capital structure decision and the cost of capital
In simple words, the capital structure is the combination of debt and equity used to finance a company. The Background reading for this module provides plenty of information regarding both the issue of the capital structure decision and the concept of the weighted average cost of capital.
For the Case Assignment, consider the following three companies:
eBay (NasdaqGS: EBAY)
The Clorox Company (NYSE: CLX)
Alaska Air Group Inc. (NYSE: ALK)
To access company background information, ratios analysis (e.g., debt/equity ratio, profitability ratios, etc.), and other information (e.g., company beta), use the following websites: ........
Case Assignment
To complete the Case Assignment, explore the websites of the above companies, read the information in the background material, search for more information, and then write a 5 page report responding to the following tasks:
Based on the readings of the module and upon reviewing total debt/equity ratios, company betas, profitability ratios, company revenue, assets, and liabilities, and the nature of the operations of the companies, including the nature of their customers and products, what would you recommend to be the capital structure (total liabilities or debt and equity proportions) for each of the three companies?
In your report, include the information along with other information that you think is necessary to answer the above question. Consider the following:
1. The nature of the business in brief (all three companies).
2. Total current assets and long-term assets of all three companies.
3. Total current liabilities and long-term liabilities of all three companies.
4. Revenue of each company.
5. Total debt/equity ratios of all three companies.
6. Profit margin, returns on assets, and return on equity ratios of all three companies.
7. Betas of all three companies.
8. The riskiness of all three companies in brief (e.g., the higher the beta, the higher the risk).
9. The advantages and disadvantages of debt over equity financing.
Note: Your report/assignment will not be accepted without proper citations and references. You must use the sources from the background material together with the sources you find on your own. It is also required that you answer all the questions related to learning outcomes.
Learning Outcomes:
1. Explain and demonstrate the use of bonds and other debt instruments in financing the firm's capital plans.
2. Identify and discuss the concept of optimal capital structure.
3. Discuss the advantages and disadvantages of debt financing and of equity financing.