This paper examines the optimal capital structure for three companies — eBay, the Clorox Group, and Alaska Air Group — by analyzing key financial ratios, beta values, and industry characteristics. Drawing on each firm's debt-to-equity ratio, profitability metrics, and capital intensity, the paper recommends appropriate mixes of debt and equity financing. It also compares the advantages and disadvantages of debt versus equity financing, covering topics such as tax deductibility, ownership dilution, and financial leverage. The analysis concludes that optimal capital structure is firm-specific and depends on a company's financial position, cost structure, growth rate, and industry context.
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In basic terms, capital structure refers to how companies finance their overall operations using various sources of funds. This paper recommends what is, in my opinion, the optimal capital structure for three selected companies: Alaska Air Group, the Clorox Group, and eBay. In determining the optimal capital structure for each firm, it is prudent to rely on a number of factors including, but not limited to, each firm's profitability and liquidity, the nature of its industry, and its individual company characteristics.
eBay is one of the largest online retailers in the world. According to Yahoo Finance (2014), the company "provides online platforms, tools, and services to help individuals and merchants in online and mobile commerce and payments in the United States and internationally." The company reports approximately 124 million customers and users across the globe (eBay, 2014). Its key competitors include Overstock.com Inc. and Amazon.com Inc. The company retails a wide range of items through its numerous business segments.
Table 1: Key Financial Statement Items
Current assets: $21,398,000 | Long-term assets: $15,676,000 | Current liabilities: $10,924,000 | Long-term liabilities: $5,285,000 | Revenue: $14,072,000 (All dollar figures are in thousands.)
Table 2: Financial Ratios
Debt-to-equity ratio: 0.78 | Profit margin: 0.19 | Return on assets: 0.07 | Return on equity: 0.13
eBay has a debt-to-equity ratio of 0.78. This ratio, according to Graham and Smart (2011), attempts to measure the financial leverage of a firm by focusing on its long-term debt. As such, eBay finances a significant proportion of its operations and assets using equity rather than debt. Like the broader retail industry, the catalog and mail-order industry does not face significant fluctuations in sales. Indeed, within the last three financial years, eBay's sales have not experienced significant volatility. The company can therefore be permitted to carry a higher degree of financial leverage. Based on the company's profitability — as indicated by its return on equity — eBay would not have difficulty meeting interest payments. Accordingly, the company should consider increasing the debt proportion in its capital structure in order to achieve an optimal capital structure.
The Clorox Group manufactures and sells a wide range of professional and consumer products. Its key segments include the Cleaning Segment, Household Segment, and Lifestyle Segment, each offering specialized products (Yahoo Finance, 2014). Some of the company's main competitors in the housewares and accessories industry include Procter & Gamble and Colgate-Palmolive Co.
Table 3: Key Financial Statement Items
Current assets: $1,420,000 | Long-term assets: $2,891,000 | Current liabilities: $1,134,000 | Long-term liabilities: $3,031,000 | Revenue: $5,468,000 (All dollar figures are in thousands.)
Table 4: Financial Ratios
Debt-to-equity ratio: 28.53 | Profit margin: 0.10 | Return on assets: 0.13 | Return on equity: 3.71
Given its relatively high debt-to-equity ratio, it is clear that Clorox has been extremely aggressive in financing its growth and operations using debt. In this case, debt holders have many times more claim on the company's assets than equity holders. It is important to note that, except for the year under consideration, the company has historically carried negative equity. Currently, however, its interest payments are sufficiently covered given its impressive revenues. It should be noted that the current debt load significantly limits how much money can be spent on share repurchases and dividends. In my opinion, the company may need to reduce some of the leverage it carries on its balance sheet, as its debt ratio is, in its current state, unacceptably high.
"Airline capital intensity justifies high debt ratio"
"Stock volatility rankings using beta values"
"Tax, control, and dilution trade-offs compared"
Shim, J. K., & Siegel, J. G. (2008). Financial management. New York: Barron's Educational Series.
Yahoo Finance. (2014). eBay Inc. (EBAY) — NasdaqGS. Retrieved from
Yahoo Finance. (2014). The Clorox Company (CLX) — NYSE. Retrieved from
Yahoo Finance. (2014). Alaska Air Group, Inc. (ALK) — NYSE. Retrieved from
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