Capital Structure the Three Companies Selected for Essay

  • Length: 5 pages
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  • Subject: Business
  • Type: Essay
  • Paper: #42173389

Excerpt from Essay :

Capital Structure

The three companies selected for this report are eBay, Clorox, and Darden Restaurants. eBay is an online auction website, acting as an intermediary between buyers and sellers. Clorox is described as being a manufacturer and marketer of consumer and institutional cleaning and household products. Some of its brands are the eponymous cleaners, Brita water filters, Burt's Bees and a variety of other brands as well. Darden Restaurants operates casual dining restaurant chains like Oliver Garden, Red Lobster and Longhorn Steakhouse. It has around 1900 restaurants in North America.

eBay's total current assets are $12.6 billion and its total assets are $27.3 billion. The current assets of Clorox are $1.2 billion and the total assets are $4.1 billion. For Darden Restaurants, the company's current assets are $663 million and its total assets are $5.4 billion.

For eBay, the company's current liabilities are $6.7 billion and the total liabilities are $9.3 billion. At Clorox, the current liabilities are $1.3 billion and the total liabilities are $4.2 billion. For Darden Restaurants, the current liabilities are $1.28 billion and the total liabilities are $3.5 billion.

For the latest fiscal year, eBay's total revenue was $11.6 billion. This compares with total revenue for Clorox in its latest fiscal year of $5.2 billion. For Darden Restaurants over this period, total revenue was$7.5 billion.

The "key statistics" page on Yahoo! Finance shows us that the total debt/equity for eBay is 11.66. For Clorox, the total debt/equity is not available, because the company has a negative equity book value. For Darden Restaurants, the total debt/equity is 136.91.

For eBay, the profit margin is 27.72%. The return on assets for eBay is 6.01%. The return on equity for eBay is 19.43%. Clorox has a profit margin of 10.45%. The company has a return on assets of 13.47%. It is impossible to calculate the ROE for Clorox because the company's equity value is negative. Without a denominator, this calculation is impossible. The profit margin at Darden Restaurants is 5.8%. The return on assets is 7.89% and the return on equity is 25.08%.

The beta for eBay is 1.36, indicating that the company's stock is more volatile than the market as a whole. Clorox has a beta of 0.42, and this indicates that the company has a low level of risk compared to the market in general. For Darden, the beta is 0.88, which is closer to the market beta, but shows that the company has a slightly lower risk than the market as a whole.

For financial managers, the decision of debt vs. equity has a number of nuances that must be taken into consideration. The first consideration is cost. Debt financing has a lower cost than does equity financing. One of the reasons for this is that creditors are superordinated relative to shareholders with respect to a firm's cash flows. This can be seen, for example, in the General Motors bankruptcy, where some creditors received at least a little bit of return on their investment, but the equity holders lost everything. With lower risk, the debt holders do not require as much return on their investment as equity holders do. As a result, the cost of debt financing is lower than the cost of equity financing.

Another consideration is control (eNotes, 2012). Creditors protect their investment in a number of ways, but one of the most important ones is through restrictive covenants that banks put on their loans. These may restrict the company by placing limits on the current ratio, the debt/equity ratio or other operating figures. In addition to such controls, debt represents a cash flow obligation that must be met. This means that there is less money left over after making interest and principal payments to re-invest back in the business or to pay out to shareholders in the form of dividends. A company may be forced to forgo investment opportunities because the cash was needed for debt service, so there are times when debt is a restriction in the company's operations, reducing the control that the managers have over the direction of the firm.

A third consideration is that the cost and availability of these forms of financing can vary. Firms cannot always tap the equity markets, so using cash for an investment could result in an increase in debt. Likewise, debt markets may at times be unreceptive to a company, forcing it to find some form of equity capital. However,…

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