Task: Capital Structure Decision and the Cost of Capital
In simple words, the capital is the combination of debt and equity used to finance a company. The background readings of this Module provide plenty of information regarding both the issue of the capital structure decision and the concept of the weighted average cost of capital.
Consider three companies: Mattel, Clorox, and MGM Resorts International. Reflect on the nature of the business of these three companies. You are recommended to also get to the web site of one company in each of these categories. You might also check what the beta of each of these companies is.
Based on the readings of the Module, and upon reviewing the nature of the operations of the companies including the nature of their customers and products, what would you recommend should the capital structure (total liabilities or debt and equity proportions) be for each of the three companies?
Note that you are not asked to provide specific numbers, just 'low debt ratio', 'medium debt ratio' or 'high debt ratio'. (Do not quote the actual company's capital structure or their debt-to-equity ratios as per their balance sheet.)
Write a report explaining your recommendations for each of these three companies. Consider the nature of their business, the riskiness of the company, and the advantages and disadvantages of debt over equity financing in your answers.