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If they are too highly-leveraged, these periods could cause irreparable harm to the company. Ideally, Choice would limit the downside damage caused by the inevitable turbulent times. The medium debt ratio achieves this.
The ideal capital structure for Dell Computers is a high debt ratio. Dell's business is growing. From their beta we can infer that Dell itself is relatively stable, since they have such a broad customer base. They sell to both businesses and consumers, with several of their product lines being business only. Thus, the bulk of their risk is market risk.
The high debt ratio gives Dell sufficient leverage to participate in their industry's growth. Without a strong cyclical downside, they are in a good position to take on a higher debt ratio, since they are unlikely to experience a strongly negative environment. They will, however, have ample opportunities to enter new markets or exploit rapidly growing markets. The result is that Dell stands to reap significant benefits from a high-leverage situation, but does not have much downside volatility.
The asset beta for Safeway calculates out as 2.063. This reflects a medium to low debt-to-equity ratio of 1.63. Safeway's asset beta evidences a company that has relatively low asset risk, a testament to the stability of their business. This relatively...
The main determinant of this high asset beta is the high debt-to-equity ratio of 6.93. Dell is a highly levered firm in a growing industry so the high asset beta is expected. This is indicative of a firm that is operating from a strong financial base in a changing industry where growth opportunities are abundant, thus giving them an incentive to increase their risk.
It is impossible to calculate the asset beta for Choice Hotels. Right now, and for the past several years, CHH has not had equity. They are highly levered, which fits with their strategy of rapid expansion and the tough business environment in which they operate. While they are in a risky financial position, CHH has been able to maintain a relatively stable balance sheet over the past five years.
Works Cited
Betas, Balance Sheets, Income Statements and Business Descriptions on all three companies obtained July 30, 2008 from Reuters.
Hatfield, Gay; Cheng, Louis; and Davidson, Wallace. (1994). The Determination of Optimal Capital Structure: The Effect of Firm and Industry Debt Ratios on Market Value. Journal of Financial and Strategic Decisions. Retrieved July 30, 2008 at http://www.studyfinance.com/jfsd/pdffiles/v7n3/hatfield.pdf
Works Cited
Betas, Balance Sheets, Income Statements and Business Descriptions on all three companies obtained July 30, 2008 from Reuters.
Hatfield, Gay; Cheng, Louis; and Davidson, Wallace. (1994). The Determination of Optimal Capital Structure: The Effect of Firm and Industry Debt Ratios on Market Value. Journal of Financial and Strategic Decisions. Retrieved July 30, 2008 at http://www.studyfinance.com/jfsd/pdffiles/v7n3/hatfield.pdf
Capital Structure A company's capital structure is the balance of different methods of financing that provides funding for the company's operations. The basic breakdown is between debt and equity, but preferred shares may also factor into the capital structure. Debt includes all forms of liabilities, including both long-term debt and current liabilities. Equity includes both the book value of shares issued and the company's retained earnings. The market value of the
Capital Structure Soliciting funding for a company investment is normally an uphill task for the company. The ideal company must convince the investors that it can repay the money. For this reason, there is a necessity to determine the company's capital structure. Capital structure guides the company agitation on funding. In fact, through the capital structure, the company achieves debt capital, equity capital, and other hybrid securities like vendor financing. The
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
Capital Structure Modigliani and Miller argued that capital structure is irrelevant, all other things being equal, but in the real world those other things are never equal. The factors that are ruled out of MM are neutral taxes, no capital market frictions, symmetric access to credit markets, and that firm finance policy reveals no information. Normally, arguments against the irrelevance of capital structure are based on these factors that MM assumed
Capital Structure Decision and Cost of Capital In basic terms, capital structure has got to do with how companies finance their overall operations using various sources of funds. In this text, I recommend what is in my opinion the optimal capital structure for the three companies selected for purposes of this discussion. The companies that will be used for purposes of this discussion are: Alaska Air Group, the Clorox Group, and
Capital Structure Analysis: Mattel, Clorox and MGM Resorts According to a report in the Journal of Applied Economics, companies with earnings/price ratios that are higher than their estimated after-tax borrowing costs, like Mattel, demonstrate that managers of publicly traded companies are in fact reluctant to make capital structure changes. Clorox, and MGM Resorts International also fit into this category, per my hypothesis. I suggest a radical move for these risk-averse managers