Use our essay title generator to get ideas and recommendations instantly
For a small business, there are two major forms of financing. Debt is when the company borrows money. Debt for small businesses usually comes from a bank, and it often has a fixed schedule of repayments, and there is interest as well. The other form is equity, which is ownership in the business (Parker, 2012). Each has its advantages and disadvantages. Debt is risky, and indeed it increases the risk to the company because the payments must be made. As a result, the payments come from pre-tax earnings before there is money for reinvestment into the company or for disbursement to the shareholders. This obligation represents risk (Harley, 2013). Debt financing has two attractive advantages, however. The first is that it is cheaper than equity financing, and for a small business might be easier to acquire. The second is that debt financing allows for retention of ownership
Harley, K. (2013). The difference between debt and equity financing for your small business. Mint Life. Retrieved February 28, 2014 from https://www.mint.com/blog/consumer-iq/the-difference-between-debt-and-equity-financing-for-your-small-business-0613/
Parker, T. (2012). Small business financing: Debt or equity? Investopedia. Retrieved February 28, 2014 from http://www.investopedia.com/ financial-edge/1112/small-business-financing-debt-or-equity.aspx' target='_blank' REL='NOFOLLOW'>
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…
eNotes. (2012). Debt vs. equity financing. eNotes Retrieved March 25, 2012 from http://www.enotes.com/debt-vs.-equity-financing-reference/debt-vs.-equity-financing
Yahoo! Finance Clorox (2012). Retrieved March 25, 2012 from http://ca.finance.yahoo.com/q/pr?s=CLX
Yahoo! Finance Darden Restaurants. Retrieved March 25, 2012 from http://ca.finance.yahoo.com/q/pr?s=DRI
Yahoo! Finance eBay. (2012). Retrieved March 25, 2012 from http://ca.finance.yahoo.com/q/is?s=EBAY &annual' target='_blank' REL='NOFOLLOW'>
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 shares is not relevant in calculating the firm's capital structure. Analyzing the capital structure of the company is done by first calculating the capital structure. Because debt and equity have different risk characteristics, the ideal capital structure of the company must be evaluated against the type of business model that it has. Different risk profiles (capital structure) are considered ideal for different types of companies. This report will analyze the capital structures of three companies -- Goodyear (NYSE: GT),…
Loth, R. (2006). Evaluating a company's capital structure. Investopedia. Retrieved October 4, 2011 from http://www.investopedia.com/ articles/basics/06/capitalstructure.asp' target='_blank' REL='NOFOLLOW'>
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 away (Villamil, n.d.). In the U.S., taxes on dividends are very different from the taxes paid on loan interest. There are transaction and bankruptcy costs; firms cannot borrow and lend at the same rate, and financial policy does reveal information. As such, MM does not hold in the real world, and this implies that capital structure does matter.
That capital structure does matter implies that for every firm there is an optimal capital structure. hat that structure might be,…
Bradley, M., Jarrell, G. & Kim, E. (1984). On the existence of an optimal capital structure: Theory and evidence. The Journal of Finance. Vol. 39 (3) 857-878.
Goldman, D. (2012). Apple announces dividend and stock buyback. CNN Money. Retrieved April 10, 2012 from http://money.cnn.com/2012/03/19/technology/apple-dividend/index.htm
MSN Moneycentral. (2012). Clorox. Retrieved April 10, 2012 from http://investing.money.msn.com/investments/stock-income-statement/?symbol=us%3aCLX
MSN Moneycentral. (2012) Mattel. Retrieved April 10, 2012 from http://investing.money.msn.com/investments/stock-balance-sheet/?symbol=us%3Amat&stmtView=Ann
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 eBay.
Optimal Capital Structure: Analysis and ecommendations
In seeking to determine the optimal capital structure for each of the three firms, it would be prudent to rely on a number of factors including but not limited to each firm's profitability and liquidity, nature of industry, company characteristics, etc.
EBay is essentially 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…
EBay (2014). EBay Inc. Retrieved from http://www.ebayinc.com/who_we_are/one_company
Graham, J. & Smart, S.B. (2011). Introduction to Corporate Finance (3rd ed.). Mason, OH: Cengage Learning.
Pride, W.M. (2013). Business (12th ed.). Mason, OH: Cengage Learning.
Shim, J.K. & Siegel, J.G. (2008). Financial Management. New York: Barron's Educational Series.
A project should not be evaluated in terms of capital structure. The financing of a project is a decision that is independent of the decision to undertake a project. This flows from the Modigliani and Miller Theorem where the choice of financing is irrelevant to the returns of the asset, all other factors being equal (Investopedia, 2012). The firm may have a preference for one type of financing or another, but those are not part of the investment decision. Indeed, the firm's existing capital structure is built into the weighted average cost of capital (ACC) calculation.
The distinction between the investor perspective and the company perspective is a falsehood. There is no such differentiation or conflict. The company exists to earn returns for the shareholder. Management acts as the agent of the shareholder, with the objective of maximizing shareholder return. Thus, the investor and the company are one…
Investopedia (2012) Modigliani and Miller Theorem (M&M). Investopedia. Retrieved April 4, 2012 from http://www.investopedia.com/ terms/m/modigliani-millertheorem.asp#axzz1r632t1Nx' target='_blank' REL='NOFOLLOW'>
All theories of capital structure are considered supplementary. As Myers pointed out it is a 'kind of puzzle and every new theory fills a small gap'. (Does Capital Structure really matter?)
Evaluating the tradeoff and pecking order theory Shyam-Sunder and Myers by analyzing the debt patterns through time they could find out that under the pecking order model, "a regression of debt financing on the firms deficit of funds should yield a slope with efficiency close to unity." (Do changes in a firm's capital structure signal information to shareholders?) They were not able to discard such hypothesis on their test for 157 U.S. firms from the years 1971 to 1989. They then strived to experiment the efficacy of their test to discriminate against the static tradeoff model. It is the faith of Shyam-Sunder and Myers that the data supports the pecking order model. According to Chirinko and Singha, however the…
Aggarwal, Raj; Aung Kyaw, NyoNyo. 2004. Internal Capital Markets and Capital Structure Choices of U.S. Multinationals' Affiliates. December. Retrieved at http://www.fma.org/Chicago/Papers/SubCapStrFMA.pdf#search= 'Capital%20structure%20theories%20of%20companyAccessed 18 August, 2005
O'Sullivan. Karen. Do changes in a firm's capital structure signal information to shareholders. Retrieved at http://www.csn.ul.ie/~karen/Articles/Maynooth%20Thesis/Thesis%20Interim%20Report.doc . Accessed 18 August, 2005
Pauwels, J.L. 2001.Does Capital Structure really matter? January. Retrieved at http://www-econo.gelso.unitn.it/cgilbert/fin2rapport.doc. Accessed 18 August, 2005
Prasad, Sanjiva; Green, Christopher J; Murinde, Victor. 2001. Company Financing, Capital Structure, and Ownership: A Survey, and Implications for Developing Economies. February. Retrieved at http://idpm.man.ac.uk/publications/archive/fd/fdwp27.pdf#search='Capital%20structure%20theories%20of%20companyAccessed 18 August, 2005
Capital Structure and the Dividend Policies
Investment in firms
Impact of taxes
Impacts of bankruptcy
The general principles for investment are applicable to every business and these may be outlined simply through saying the one should invest in projects that provide greater yields than the basic minimum acceptable rate. The rate is naturally to be dependent on the risk involved in the project. It should also reflect the basic financing mix used and this means the mixture of the owners' funds or equity or capital and borrowed money or debt. The returns from the project will have to be measured through the cash flows generated as also the timing of the cash flows, and these cash flows can be either additive or depletive.
The important part of financial management is to choose a correct financial mix that gets a return as per the current…
Damodaran, Aswath. "Corporate Finance: Lecture Note Packet 2" Retrieved at http://pages.stern.nyu.edu/~adamodar/pdfiles/cfovhds/cfpacket2.pdf . Accessed on 06/08/2004
Harvey, Campbell R. (December 4, 1995) "Capital Structure and Payout Policies" Retrieved at http://www.duke.edu/~charvey/Classes/ba350/capstruc/capstruc.htm . Accessed on 06/08/2004
Distributions to Shareholders and Dividends and Repurchases" Retrieved at http://www.business.umt.edu/faculty/Crawford/FIN%20439/Fin%20439%20Spring%202004/Notes/Chapter%2016.doc. Accessed on 06/08/2004
Koch, Paul D; Shenoy, Catherine. "The Information Content of Dividend and Capital Structure Policies" Retrieved at http://lark.cc.ku.edu/~cshenoy/Research%20Papers/FMArticle2.pdf. Accessed on 06/08/2004
Little study has been conducted of Indian firms debt-to-book rations before Rajagopal, but he indicates that, given the relatively recent expansion of India's economy, the difference between the U.S. And India, for example,, is not nearly as prohibitively large a one might suspect. This is not to deny that India faces persistent challenges unique in its place in the world: the nation has been "traditionally weighed down by heavily regulated capital markets, opaque accounting and disclosure, and weak corporate governance," but "its economy has seen significant market reform and liberalization since July 1991. As a result, total market capitalization has exploded (for example, tripling between 2002 and 2006), and debt issuance and M&a activity have also seen very significant growth" (Rajagopal 2009, p.28). Changes in the expanding world economy have surprised many analysts in terms of the seismic shift in India's business culture and ability to rationally deploy capital.…
Amortization. (2009). Money terms. Retrieved September 6, 2009 at http://moneyterms.co.uk/amortisation/
Pardasani, Manoj. (2009, September). India initiates thin capitalization. (2009, September).
Businessline. Retrieved September 6, 2009, from ProQuest Asian Business and Reference. (Document ID: 1852788851)
Rajagopal, S. (2009). "On the portability of capital structure theory," Allied Academies
The optimal capital structure depends on a number of factors. The nature of the business that the company is in is important, in particular the fluctuations in the company's cash flows. The company should also consider the time frame for which the capital is being used. In addition, the optimal capital structure also depends on the degree to which the company is willing to cede control, and the cost of capital that it desires (Kennon, 2011). Thus, for every different firm there will be a different optimal capital structure.
Mattel is in a stable business, its revenues ranging between $5.4 and $5.9 billion in each of the past five years and its net income fluctuating between $379 million and $684 million during that same period (MSN Moneycentral, 2011, 1). This high level of predictability in the firm's business means that it can handle a high degree of leverage.…
Kennon, J. (2011). An introduction to capital structure. About.com. Retrieved May 31, 2011 from http://beginnersinvest.about.com/od/financialratio/a/capital-structure.htm
MSN Moneycentral. (2011). Mattel. Retrieved May 31, 2011 from http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?symbol=MAT
MSN Moneycentral. (2011). Clorox. Retrieved May 31, 2011 from http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?symbol=CLX
MSN Moneycentral. (2011). MGM International. Retrieved May 31, 2011 from http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?symbol=MGM
Corporate finance focuses on financial decisions made by financial managers. Financial decisions is broadly categorized into two: financing decisions and investment decisions (Renzetti, 2001). Investment decisions determines the composition of assets held by a firm while financing decisions focuses on the optimal mix of debts and equity (capital structure). An optimal capital structure can be defined as a combination of equity and debt that maximizes shareholders’ wealth or value of a firm. The value of a firm “is the present value of expected future cash flows to be generated by the assets, discounted at the company’s weighted average cost of capital (WACC). Generally, the determination of optimal capital structure is a complex decision process involving calculations of various debt-equity ratio. In this paper, the capital structure of Afterpay Touch Group Limited (ATP), FlexiGroup Limited (FXL), and Zip Co Limited (Z1P) will be calculated, theories of optimal capital structure will…
Essentially, there are really only two ways in which organizations can raise money -- debt or equity. The core of this comes down to cash flow for each type of financing. A debt claim, for instance, allows the holder to a set of cash flow, typically principle and interest; an equity claim entitles the holder to any leftover cash after meeting all other claims. Secondly, debt has prior claim on cash flow and assets. This complicates the matter of the way debt is managed and analyzed when looking at different industries. For instance, debt as a percentage of the market value of equity in an airline would be different than one in say, electronics -- all dependent upon a variety of inventory and supply/demand, price elasticity ratios.
Organizations that have high debt-equity ratios seem to be the ones that have longer term, or higher cost-based services; or those…
The cyclicality of Choice, evidenced by their beta, and the intense competitive pressures, means that the firm is at risk for periods of difficulty. 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. ithout a strong cyclical downside, they are in a good position to take on a higher debt ratio,…
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 Decision and Cost of Capital
My SLP Company of choice is Wal-Mart Stores. The other two companies I will be relying on for purposes of this discussion are Target Corp. And Costco Wholesale Corporation. Both companies happen to be in the same industry as Wal-Mart Stores. Most specifically, this text will compute the debt ratio and the debt-to-equity ratio of Wal-Mart Stores and discuss whether or not these ratios could be regarded too large or too small. Further, comparisons will be made between the debt-to-equity ratio of Wal-Mart Stores and that of its two competitors - Target and Costco.
The debt ratio in the words of Graham and Smart (2011, p. 44) is "a measure of the proportion of total assets financed by a firm's creditors." It is computed by dividing the total debt figure with the summation of equity and total liabilities. All the dollar figures below…
Borowski, A. (2010). Financial Management: The Role and Importance of Capital Markets and EMH. Norderstedt Germany: GRIN Verlag.
Graham, J. & Smart, S.B. (2011). Introduction to Corporate Finance (3rd ed.). Mason, OH: Cengage Learning.
Porter, G.A. & Norton, C.L. (2010). Financial Accounting: The Impact on Decision Makers (7th ed.). Mason, OH: Cengage Learning.
Quiry, P., Fur, Y.L., Salvi, A., Dallochio, M. & Vernimmen, P. (2011). Corporate Finance: Theory and Practice (3rd ed.). Chichester, West Sussex: John Wiley & Sons.
Simerly and Li believe that an organization must find a match or fit between the demands of its competitive environment and its internal management systems in order to succeed and to survive." In general, the authors recommend firms in industries with low rates of environmental change high economic performance choose equity over debt in financing projects with uncertain outcomes. Conversely, firms in industries with high rates of environment change and low economic performance should consider increasing debt to increase returns to investors. Further, Simerly and Li caution that increasing debt brings more external control and that management needs to decide how much autonomy is appropriate for the organization.
Modigliani & Miller (M&M propositions I & II) - Capital structure of corporations. Retrieved from Web site: http://www.financescholar.com/modigliani-miller-propositions.html
Simerly, R.L. And Li, Mingfang. Re-thinking the capital structure decision. Retrieved from Web site: http://www.westga.edu/~bquest/2002/rethinking.htm
Modigliani & Miller (M&M propositions I & II) - Capital structure of corporations. Retrieved from Web site: http://www.financescholar.com/modigliani-miller-propositions.html
Simerly, R.L. And Li, Mingfang. Re-thinking the capital structure decision. Retrieved from Web site: http://www.westga.edu/~bquest/2002/rethinking.htm
Although advertising costs can be substantial, it is essential that companies place significant amounts of funding into advertising. Such funding is necessary because it provides companies with a competitive advantage. According to Doraszelski & Markovich, (2007)
"Practitioners know very well the value of advertising to achieving their long-term market share and profitability goals. A survey of senior executives in 1999 reveals that 82.9% somewhat or strongly agree that good advertising can provide their company with an edge over the competition in the marketplace. Furthermore, 86.8% somewhat or strongly agree that advertising is a long-term investment that contributes to the financial growth and stability of their company (American Advertising Federation, 1999; Doraszelski & Markovich, 2007)."
The authors also explain that firms believe that advertising has the capacity to give them a sustainable competitive advantage over other firms (Doraszelski & Markovich, 2007). Nevertheless, dynamic models of advertising competition, assert that the opposite…
Bagwell, K. (2005) the Economic Analysis of Advertising. http://ideas.repec.org/h/eee/indchp/3-28.html
"Brand Value." http://dictionary.bnet.com/definition/brand+value.html
Doraszelski U., Markovich S. (2007). Advertising dynamics and competitive advantage. RAND Journal of Economics Vol. 38, No. 3, pp. 557 -- 592
Grullon G., Kanatas G. And Kumar P. 2006. The Impact of Capital Structure on Advertising Competition: An Empirical Study.
The company finances foreign operations with debt from a number of different countries. It does this on the basis of the parent company's credit rating, which illustrates that the implicit understanding with respect to the parent company default guarantee of subsidiary debt holds across different debt markets (Stern & Chew, 2003, 394).
There are also times when the capital structure is determined more by strategic considerations than any other. Many firms operate foreign subsidiaries as joint ventures, for example, because this gives the firm greater access to foreign capital markets and usually reduces the country risk and market risk associated with the subsidiary, when compared to a greenfield subsidiary. There is evidence that firms using this tactic do so in part to reduce the costs associated with foreign market entry, including financing costs. Hennart's (1991, 483) study of Japanese subsidiaries in the United States showed that transaction costs played a…
Desai, M.; Foley, C. & Hines, J. (2003). A multinational perspective on capital structure choice and internal capital markets. Harvard Business School. Retrieved February 11, 2011 from http://www.people.hbs.edu/ffoley/capstructure.pdf
Gropp, R. (2002). Local taxes and capital structure choice. International Tax and Public Finance. Vol. 9 (1) 51-71.
Hennart, J. (1991). The transaction costs theory of joint ventures: An empirical study of Japanese subsidiaries in the United States. Management Science. Vol. 37 (4).
Stern, J. & Chew, D. (2003). The revolution in corporate finance. Malden, MA: Blackwell Publishing.
a) The free cash flow model implies that the value of the firm is the present value of the expected future free cash flows. Under this model, capital structure can affect firm value. The free cash flow model is as follows (Cherewyk, 2015):
FCF = EBIT (1-t) + depreciation -- CAPEX -- ? working capital -- ? other assets
In this portion of the model, the free cash flow is not affected by the capital structure. Interest on debt is not included in the free cash flow, nor is the tax effect of this interest. However, when the free cash flow is discounted, it is discounted using the weighted-average cost of capital, and that is affected by the level of debt and the cost of debt. By changing the WACC, the firm changes the rate at which the free cash flow is discounted, thereby affecting firm value. Generally,…
Cherewyk, P. (2015). Valuing firms using present value of free cash flows. Investopedia. Retrieved August 31, 2015 from http://www.investopedia.com/ articles/fundamental-analysis/11/present-value-free-cash-flow.asp' target='_blank' REL='NOFOLLOW'>
Business -- Corporate Finance -- Capital Structure Decisions and the Cost of Capital
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?
a) eBay, Inc.
The nature of eBay's business is global online retail connecting more than 124 million buyers and sellers for the sale and purchase of more than 500 million items (eBay, Inc., 2013). As of September 30, 2013, measured in thousands, eBay's: total current assets are $23,476,000 (Yahoo! CA Finance, 2013); long-term assets are $40,067,000 (Yahoo! CA Finance, 2013); current liabilities are $12,028,000 (Yahoo! CA Finance, 2013); long-term liabilities are $17,300,000 (Yahoo! CA Finance, 2013);…
Alaska Air Group, Inc. (2013). Historical overview. Retrieved December 1, 2013 from www.alaskaair.com Web site: http://www.alaskaair.com/content/about-us/history/overview.aspx
Damodaran, A. (2005). Finding the right financial mix: The capital structure decision. Retrieved December 1, 2013 from pages.stern.nyu.edu Web site: http://pages.stern.nyu.edu/~adamodar/pdfiles/cfovhds/capstr.pdf
eBay, Inc. (2013). One company | ebay inc. Retrieved December 1, 2013 from www.ebayinc.com Web site: http://www.ebayinc.com/who_we_are/one_company
Peavler, R. (2013). Debt and equity financing. Retrieved December 1, 2013 from bizfinance.about.com Web site: http://bizfinance.about.com/od/generalinformatio1/a/debtequityfin.htm
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 commencing report will examine Microsoft Capital structure. The report will prove that Microsoft can achieve a coherent financial liberation if it pursues capital-funding mechanisms that are investment conscious.
Microsoft Capital Structure
Microsoft capital structure comprises of residual distribution model in practice. Berg Aspelund and Sorheim (2008, pp. 33) joins this analysis by arguing the residual distribution facilitates determination of estimates returns and investment. Microsoft assesses its opportunities assessed on the average for the next five years. In addition, the…
Berg, M.S., Aspelund, A., & Sorheim, R. (2008). The hybrid structures of international new ventures: A social capital approach and research agenda. The International Journal of Entrepreneurship and Innovation, 9(1), 33-42.
Bertomeu, J., Beyer, A., & Dye, R.A. (2011). Capital Structure Cost of Capital, and Voluntary Disclosures. The Accounting Review, 86(3), 857-886.
Porteous, B.T., & Tapadar, P. (2008). The Impact of Capital Structure on Economic Capital and Risk Adjusted Performance. ASTIN Bulletin, 38(1), 341-380.
Wang, S. (2010). An Application of Fuzzy Set Theory to the Weighted Average Cost of Capital and Capital Structure Decision. Technology and Investment, 01(04), 248-256.
This differs from the more static view taken by Mehrotra. There are a couple of reasons for this key difference. One is that Mehrotra only studied spinoff firms. These firms are easier to study because the managers must choose a capital structure for the new firm. However, this makes for an imperfect survey.
Barclay on the other hand has studied a much broader basket of companies. This forced the use of proxies, but it also provided a more accurate view of corporate behavior with respect to capital structure on a day-to-day basis, rather than simply on a special event basis.
The more credible paper of the two in addressing the rationale behind capital structure is that of Barclay. Both papers used empirical tests, but the methodology behind the Barclay paper was more broad-based, meaning that it can be applied outside of the specific spinoff situation. Barclay has made some determinations…
A preview of capital structure issues
In regards to the overall business environment, capital structure has profound implications of the business, irrespective of its industry. For one, a firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells $40 billion in equity and $160 billion in debt is said to be 20% equity-financed and 80% debt-financed. The firm's ratio of debt to total financing, 80% in this example is referred to as the firm's leverage. This leverage has implications on the entire firm. For example, leverage in many respects is a double edges sword. On one hand, leverage can amplify gains for firms. However, if used incorrectly, leverage can also amplify loses. As such, firms must be cognizant of its capital structure as complacency can hinder overall business performance. Debt and equity financing, can have a profound implications on the…
1) Myers, Stewart C.; Majluf, Nicholas S. (1984). "Corporate financing and investment decisions when firms have information that investors do not have." Journal of Financial Economics 13 (2): 187 -- 221
2) Baker, Malcolm P; Wurgler, Jeffrey (2002). "Market Timing and Capital Structure." Journal of Finance 57 (1): 1 -- 32.
3) Lyandres, Evgeny and Zhdanov, Alexei, Investment Opportunities and Bankruptcy Prediction (February 2007) Available at SSRN: http://ssrn.com/abstract=946240
4) Timmer, Jan (2011). Understanding the Fed Model, Capital Structure, and then Some.
Another important issue to consider in the contraction of debt is represented by the impact of this debt on the company stakeholders -- employees, business partners, the public, and most importantly, the share holders. The primary scope of the economic agent is that of creating value for its stakeholders, but excessive debt could jeopardize this desire, especially since debt is money that has to be repaid and it as such reduces the future levels of profitability.
At the level of value creation, a crucial aspect to be analyzed is represented by the source of the debt to be contracted. On the one hand, there is the contraction of debt through loans, which are characterized by the fact that control and ownership of the company remains intact, but payments have to be regularly made; the payments are nevertheless tax deductible.
On the other hand, there is the contraction of…
SAC Capital Structure
The Sparklin Automotive Company needs to make a capital investment of $3,000,000 to improve its manufacturing facilities. This investment needs to be carefully considered along two dimensions. The first of these is that the company needs to consider the investment from a capital budgeting point-of-view. The second is that the company does not want to change its capital structure as the result of this decision. The current capital structure is 60% equity and 40% debt. The company needs to utilize the best analytical tools possible for making a capital budgeting decision. There are a number of methods that are common. A net present value (NPV) calculation, an internal rate of return (IRR) calculation, and a payback period calculation are three of the most common. Each of these will be considered, although NPV is the most trusted methodology because it is most closely aligned with total shareholder value.…
Investopedia (2010). Weighted average cost of capital. Investopedia. Retrieved September 3, 2011 from http://www.investopedia.com/ terms/w/wacc.asp' target='_blank' REL='NOFOLLOW'>
Business Financing and the Capital Structure
Generally, businesses need to make several financial decisions that have significant direct effects on their operations and success in the increasingly competitive marketplace. However, there are numerous varying options that are available to businesses regardless of the types and sizes. The concept of business financing has emerged as an important aspect in the modern business environment because of the various financial decisions to be made by different firms. The main aim of this concept is to generate enough capital for the business to meet its existing needs in order to promote the growth of the business. In addition to generating capital for the growth of the business, business financing helps firms to meet the recurring financial obligations.
Use of Financial Planning in Estimating a Corporation's Asset Investment equirements:
Financial planning can be considered as a process that is used to approximate the financial requirements…
Coplan, J.H. (2009, December 4). Raising Capital: Equity vs. Debt. Bloomberg Businessweek
Magazine. Retrieved June 2, 2013, from http://www.businessweek.com/magazine/content/09_72/s0912030511552.htm
Melicher, R.W. & Norton, E.A. (2011). Introduction to finance: markets, investments, and financial management (14th ed.). Hoboken, NJ: John Wiley & Sons, Inc.
Sharp, R. & Hua, W. (2004, January 4). International Investing: The Risks and Rewards.
The capital structure refers to the way that the company is financed. There are two basic forms of financing -- debt and equity -- and a number of other choices that can be made within the scope of those options. The capital structure for Simpson Manufacturing as of December 31, 2011 is 11.3% liabilities and 88.7% equity. The company has $5.239 million in long-term debt, $95.515 million in total liabilities and $789.6 million in shareholder's equity. This capital structure is appropriate for the type of company that Simpson is, and the type of industry in which it operates. The income statement shows that the company is modestly profitable, but that profits are declining. The combined effects of share buybacks and dividends have reduced the value of the firm in fiscal 2012. Given that the company is in a state of contraction, a policy of limiting debt and total…
Simpson Manufacturing Q4 2012 Results. Retrieved March 4, 2013 from http://www.simpsonmfg.com/docs/results-2012-4Q.pdf
5x -- 50,000
200,000 / 7.5 = 26,6667 units
1e) the ROE for the first scenario is 140,000 / (0.85*350,000) = 47%
the ROE for the second scenario is 140,000 / (0.65*350,000) = 61.5%
The difference is 61.5 -- 47 = 14.5%
1f) the dividend payout structure is going to be as follows. The taxable income will be as follows:
($200,000 * .35) = $70,000 of debt. The interest will be (70,000)(.105) = $7,350
So taxable income will be $200,000 -- 7350 = $192,650
Tax at 30% is $57,795
Thus, net income is $192,650 - $57,795 = $134,855
The equity needed for the capital budget is (.65)(150,000) = $97,500
The dividends are therefore calculated as $134,855 - $97,500 = $37,355
The payout is therefore $37,355 / $134,855 = 27.7%
2. a) the company faces some risks if it tightens the credit policy. It will reduce its accounts receivable if it…
50 a share if IST issues equity.
c. If IST issues debt, the share price can stay the same and the company has extra tax benefits.
d. The answers would not change, it would just make it more feasible to borrow the money.
Managers would choose to borrow the $500 million because of the debt tax shield and because it would give them more control over their company rather than issuing equity because if they issue equity, they can't control the cost of the shares, it might drop below the current possibility of $12.50 per share and also, they would possibly have someone come in and buy out the company by buying up large quantities of shares to get a majority of the shares. Of course, they would also face the possibility of losing control of the company if they didn't pay (weren't able to pay) the debt payments, but…
Sharpe Investing (2007) When to issue debt vs. equity. Retrieved from http://www.sharpeinvesting.com/2007/11/when-to-issue-debt-versus-equity.html. May 28, 2011.
Business Financing and the Capital Structure
In finance, capital structure is used to refer to the manner in which a corporation finances its assets through some mixture of equity, debt, or hybrid securities (Atrill & McLaney, 2011). A firm's capital structure is the configuration or structure of its long-term liabilities and each firm can choose a different configuration depending on its industry and/or its specific needs. Basically, a company has two choices in traditional capital financing.
The company can either sell equity, usually through the issuance of stocks or bonds, or it can sign a note with more of a traditional lender such as a bank in which a specific payment structure will be associated with the loan. Each manner of financing capital has different strengths and weakness that be relevant to a company depending on their circumstances and their goals. This analysis will briefly outline some of…
Atrill, P., & McLaney, E. (2011). Finance and accounting for managers. Harlow, UK: Pearson Custom Publishing.
Kuhn, R. (2011, June 21). What Do Investment Banks Do? Retrieved from Chief Executive: http://chiefexecutive.net/what-investment-banks-do
To, H. (2006, October 22). The Importance of the "Roll Return" in Commodity Futures Returns. Retrieved from Market Thoughts: http://www.marketthoughts.com/z20061022.html
Financial leverage reflects the degree to which a company has debt in its capital structure. The more debt is in the capital structure, the higher the leverage of the company. The reason is that with more debt, the company's financial risk is higher. It must pay out more of its earnings to the creditors, increasing the risk that there is nothing left for shareholders. However, of what is left, it is spread among fewer shareholders. As a result, a company that is highly profitable will return tremendously to shareholders. The returns to shareholders (OE) are much more volatile the higher the degree of financial leverage a company has. If a firm uses preferred stock in its capital structure, that is still financial leverage. Preferred stock dividends do not typically change, so preferred stock does usually create and maintain an obligation to those shareholders, even if preferred stock is subordinated…
Hamilton, W. (2012). Apple yields to investor pressure with decision to pay dividends. Los Angeles Times. Retrieved September 17, 2015 from http://articles.latimes.com/2012/mar/20/business/la-fi-apple-dividend-20120320
Investopedia (2015). Operating leverage. Investopedia. Retrieved September 17, 2015 from http://www.investopedia.com/ terms/o/operatingleverage.asp
Bank of New York Mellon has three core statements that they adhere to and abide by. Those three statements are their company perspective, their mission/values statement and their vision statement. Their company perspective if as follows:
"We have built our company upon a well-defined strategy; provide a breadth of financial solutions to our customers -- what they need, when they need them, how they want them delivered. It's the core of our success in the market place, the root of shareholder value, our foundation for growth" (Making a Fortune, 2015).
The company perspective explains that they have created their company from the ground up using the depth and breadth of their financial knowledge. They are committed to delivering what their clients need and in a timely manner. They assert that this is the "core" of their success because if they were not able to provide such timely, accurate and fruitful…
BNY Mellon. (2015). BNY Mellon Asset Management - Page Title. Institutional.bnymellonam.com. Retrieved 22 September 2015, from http://institutional.bnymellonam.com/products/composites/1162.html
Corality. (2015). Features of a cash flow waterfall in project finance - Corality. Corality.com. Retrieved 22 September 2015, from http://www.corality.com/training/campus/post/cash-flow-waterfall-in-project-finance
Glassdoor. (2015). BNY Mellon Salaries. Glassdoor. Retrieved 22 September 2015, from http://www.glassdoor.com/Salary/BNY-Mellon-Salaries-E78.htm?filter.jobTitleFTS=Corporate+trust
Investopedia. (2015). Investopedia - Educating the world about finance. Investopedia. Retrieved 22 September 2015, from http://www.investopedia.com/
D 20 Lev
D 50 Lev
5. The only project that is unacceptable is Project D. At the 50% leverage level. This has a negative NPV. The other projects at each leverage level all have positive net present values. The following graph shows the NPVs for the different projects:
6. My objective in making this decision is to maximize firm value. The projects are mutually exclusive. I would use NPV as the main criteria. This means that Project B. is the most desirable, at the zero leverage level. Project A is the second-most desirable, against at the zero leverage level. Project C. is the third-most desirable. Project D. is the least desirable and at the 50% leverage level is unacceptable. I feel that it is best to use NPV has the criteria…
The recapitalization of the fleet is however in need to be changed in the meaning of adding new sources of income to ensure the adequate functioning of the fleet. In this order of ideas, the following are noteworthy for consideration:
a) Attracting more sponsorships
The targets of these actions would be large corporations or other significantly wealthy institutions. On the one side, these contributors would benefit in image and reputation from the support they offered to the fire department. The improved image would materialize in increased trust from the part of community and even higher sales levels. On the other hand however, the corporations would receive tax incentives for the sponsorships meaning as such that they would once again be remunerated for their financial support. Given these two benefits, it would be rather efficient to approach corporations for sponsorships and the success rates estimated for this endeavor are high.
Work, R.O., 2005, To take and keep the lead: a naval fleet platform architecture for enduring maritime supremacy, CBA Online, http://www.csbaonline.org/4Publications/PubLibrary/R.20051200.To_Take_and_Keep_T/R.20051200.To_Take_and_Keep_T.pdf last accessed on August 24, 2010
1998, Recapitalizing the navy: a strategy for managing the infrastructure, National Academic Press, ISBN 0309063353
2010, Recapitalization, Investopedia, http://www.investopedia.com/ terms/r/recapitalization.asp' target='_blank' REL='NOFOLLOW'>
But even with no cost savings whatsoever, this project has a positive NPV.
e can see, therefore, that the greatest area of sensitivity is with the terminal value. The terminal value at present is worth $143 million of the NPV. If we break down the variables that go into the terminal value, however, we notice that the cost savings are critical. If SGA expense is not reduced, then the terminal value is reduced to $67 million and the total NPV for the entire project ends up being $98 million. This figure is less sensitive to the change in cost of goods sold.
e should also consider testing combined sensitivity of our shakiest projections. Sales may not live up to expectations and cost savings might not occur. If we assume no net income and no additional cost savings, the project will have an NPV. If we assume that our expectations for…
No author. (2009). Free Cash Flow. Investopedia. Retrieved May 13, 2009 from http://www.investopedia.com/ terms/f/freecashflow.asp' target='_blank' REL='NOFOLLOW'>
Making a decision as a venture capitalist, whether as a director/adviser for a venture capital firm or as an individual investor looking for a substantial investment opportunity, requires a great deal of consideration on various levels. Before a decision to invest is made, a careful consideration of the quantitative and qualitative aspects of a company must be undertaken, and the potential payoff of any investment must be weighed against the risks identified both within the company and in its operating environment. The following paragraphs will present a brief analysis of two publicly traded companies that are well-established, yet are also potentially large investment opportunities for an entity with an appropriate amount of capital. The risks and current states of these companies will be assessed along with other details and information in order to determine which company represents the best investment.
pSividia Corp., founded in 1987, specializes in…
Yahoo Finance. (2011). PSVD. Accessed 2 June 2011. http://finance.yahoo.com/q/pr?s=PSDV+Profile
Yahoo Finance. (2011). SMED. Accessed 2 June 2011.
Therefore, the specific amount of debt within the firm has a strong impact on the determining the accurate weighted cost of capital. Actually, the determination of a firm's WACC is dependent on the debt value together with the value of equity.
While debt capital is the lower cost source of capital, debt is usually borrowed from sources outside the multinational enterprises since subsidiaries tend to borrow directly from markets. Therefore, multinational enterprises don't highly leverage their capital structure because of the source of debt. Moreover, MNEs don't highly leverage their capital structure because this is one of the most complex aspects of financial decision making that is closely linked to other financial decision variables ("Leverage and Capital Structure," n.d.). These enterprises don't highly leverage because poor capital structure decisions can contribute to high cost of capital, which in turn lowers the net present value of projects and makes them increasingly…
"Cost of Capital." (n.d.). Chapter 14. Retrieved from University of Windsor website:
Drake, P.P. (n.d.). The Cost of Capital. Retrieved from James Madison University website:
Because Ameritrade's Initial public offering was in March of 1997, the time series is to short for estimating beta (August 1997), as the provided data will give inaccurate results. That's why in order to estimate beta for Ameritrade correctly we can refer to the finance data of the comparable companies. It means that we should choose companies, which have cash flows with similar risk indexes, as these companies will have same asset beta indexes. For running such test 14 different firms in 4 industries (investment services, Internet services, discount brokerage, internet) were chosen: A.G. Edwards, Bear Stearns, Lehman Brothers, MSDW, Paine Webber, . James, Merrill Lynch, Mecklemedia, Netscape, Yahoo, Charles Schwab, E*Trade, Quick & eilly, Waterhouse Investor Services.
We can use the following formula to calculate beta for the firms above:
In order to estimate reliable results we should choose firms, which specialize in brokerage services. Discount brokerage firms get…
Mitchell, Mark Stafford, Erik Cost of capital at Ameritrade, Harvard Business School April 26, 2001
Federal Government vs. Private Accounting
abaasso, C., Briars, M. & abasso, J. (2015). oyal family business in Qatar and the Emirates through sports club management: Green washing or a sustainable model? The cases of FC Barcelona and Manchester City. IJES Vol. 23 (2) 5.
This paper explores a couple of concepts. The authors look at two examples of sports teams -- FC Barcelona and Manchester City -- that are owned by royal families, one in Qatar and the other in Abu Dhabi. The first premise is that the authors contend these sporting clubs engage in "sustainable" and "responsible" activities. The second element of the article ponders whether those activities will affect a culture shift in these home nations, with the royal families essentially learning things about these concepts from the West and then applying them to their own nations.
On the first point, the author does not do a particularly good job at outlining the…
Mera, X. (2010). Factor prices under monopoly. Quarterly Journal of Austrian Economics. Vol. 13 (1) 48-70.
Rabaasso, C., Briars, M. & Rabasso, J. (2015). Royal family business in Qatar and the Emirates through sports club management: Green washing or a sustainable model? The cases of FC Barcelona and Manchester City. IJES Vol. 23 (2) 5.
einvestment rates are an embodied assumption in the NPV, I and MI methods because in each of those methods, the cost of capital for the company is typically used as the discount rate. The cost of capital for the company is going to be comprised of the different elements of the capital structure, but in each of those the reinvestment rate is a key factor. It is assumed that the cost of capital is the reinvestment rate under each of these methods, and this assumption introduces the potential for error.
The assumed reinvestment rate of MI is the cost of capital, but this is problematic for a couple of reasons. The first is that this does not take into account project-specific risk (Damodar, n.d.). Each project has its own risk. Thus, the reinvestment rate should not necessarily be the same rate that is used in an NPV, I…
"Chapter 10: Capital budgeting -- why it matters" (2014) Norwich University. In possession of the author.
Damodar, A. (no date) The components of risk. NYU Stern School of Business. Retrieved Jul 12, 2016 from http://pages.stern.nyu.edu/~adamodar/New_Home_Page/invfables/riskcomponents.htm
In a firm, most of the capital source comes from accumulation. This concept of capital accumulation defines how wealth is generated for the company by adding up amount in cash or other forms of asset into the capital account. Capital accumulation is solely for increasing the profits on the possession of the firm and no other aims are attached with it other than bolstering the revenue holdings of the company. Capital accumulation is not connected with increment in labor input or output. It is dependent upon the existing company profits that the firm uses to maximize the existing capital. Assets that are in possession of the firm can be used to increase the capital by appreciating in their value or acquire assets that can be used to create further wealth. Other ways firms bring accumulation of capital into process is through acquiring shares or mutual funds. Capital accumulation…
Giddens, A. (1996). Capitalism and Modern Social Theory. Cambridge [u.a.]: Cambridge Univ. Press.
Hunt, E.K., & Lautzenheiser, M. (2011). History of Economic Thought: A Critical Perspective. Armonk, N.Y.: M.E. Sharpe.
TR Jain, A.M. (2009). Development Economics. Chicago: FK Publications.
esults and acceptability of the item for key stakeholders
Da Vinci is a lucrative product that has immense contributions to the delivery of health services in many health centres globally. The effectiveness of the product lies on its new entry into the modern market. Da Vinci production and use have enlightened the public and hospital fraternities on new approaches of managing surgery operations. The resultant effects that are going to be felt after using the product are more increasing and beneficial than using the old mechanisms. The innate objective of the tool will improve on delivery of surgery services in ways that are more safe, effective, and affordable to the public. Da Vinci was first introduced as a safe way of improving surgery operations in the hospitals. Moreover, the use of the product had not been made public. Now that the machine will be available in many health…
Athanasiou, T., Debas, H.T., & Darzi, A. (2009). Key topics in surgical research and methodology. Berlin: Springer.
Bahouth, M.N., Bahouth, M.N., Blum, K., & Simone, S. (2013). Transitioning into hospital-based practice: A guide for nurse practitioners and administrators. New York, NY:
Springer Pub. Co.
Gitman, L.J., & McDaniel, C.D. (2009). The future of business: The essentials. Mason, OH:
Capital Requirement and Risk ehavior
Arab African International ank
Midan ElSaray El Koubra, Garden City Caoro
The research will mainly dwell on the capital requirements and risk behavior of banks, more in particular the credit risk. The purpose of this research is to identify and analyze the relationship between capital requirements and the risk behavior of banks in Egypt
more in particular the Arab African International ank, which is the case study for this research. Secondly, the research will seek to investigate the impact of capital regulation on the banking behaviors and particularly on the levels of credit risk of banks operating in Egypt
The findings of the research show that there is negative relationship between capital requirement and banks' risk behavior; the findings also show there is empirical evidence to prove that capital regulations have a negative impact on credit risk of banks levels of credit risk of banks…
Aggarwal, R. And K. Jacques, (1998), a Simultaneous Equation Estimation of the Impact of Prompt Corrective Action on Bank Capital and Risk, New York, 12-23
Avery, R.B. And A.B. Berger, (1991), Risk-based capital and deposit insurance reform, Journal of Banking and Finance pp 847-874
Berger, A.N., Herring R.J. And Szego, G.P. (1995), the Role of Capital in Financial
Institutions, Journal of Banking and Finance pp 19, 393-430.
The aim of hospitals is to measure and improve the quality of health care service for the patients. Patient satisfaction is the foremost concern. However, to run a hospital, there are a lot of other factors are also involved; e.g. managing cost, budgeting, optimizing operations and increase patient satisfaction level. In order to achieve the desired level of performance, the hospital needs to be up-to-date with the latest technology.
In this era of technological advancements, every company has to maintain all their records on computer because it saves time and needs less effort than manual work. Our hospital has digitalized their data but every department has its own data base. In order to optimize the operations, hospital requires having a central data base system.
As Schuhmann (2009) stated in his article that the recent economic crisis has made it difficult for hospitals finance their capital expenditures. The capital…
Bailey, C. (2012). The Cost Reduction Imperative. Becker's Hospital Review.
Cleverly, W.O., Cleverly, J.O., & Song, P.H. (2010). Essentials of Health Care Finance. Jones & Bartlett Learning.
Devraj, S., & Kohli, R. (2000). Information Technology Payoff in the Heath-care Industry: A Longitudinal Study. Journal of Management Information Systems, 41-67.
Finkler, S.A., Kovner, C.T., & Jones, C.B. (2007). Financial Management for Nurse Managers and Executives W.B. Saunders Company.
EU nations have blamed deregulation in the U.S. sector for the credit crisis and subsequent recession, specifically the complex risk exposures not fully understood and assessed by banks and investors; poor and fraudulent underwriting standards; lack of investor and agency due diligence; a failure of transparency; and the structure of compensation schemes and incentives in the U.S. banking industry (Griffin 2008). The failure of the U.S. capital adequacy standards was apparent when even U.S. banks that possessed what would, under normal circumstances be adequate capital reserves were taxed in the subsequent panic, after Lehman Brothers was not 'bailed out' by the U.S. government and many lenders demanded a return on their investments.
The EU has always had more stringent liquidity risk management system. The current system requires all banks to have liquid assets that cover 100% of potential outflows over am eight-day period and 90% of potential outflows over a…
Capital adequacy. (2009). The Business Dictionary. Retrieved November 8, 2009 at http://www.businessdictionary.com/definition/capital-adequacy.html
Griffin, Conor. (2008, July 8). Basel II: Capital adequacy regulations and the credit crisis -- cause or cure? Chartered Accountants. Retrieved November 8, 2009 at htp://www.charteredaccountants.ie/Members/Technical1/Financial-Services/Accountancy-Ireland-Articles/BASEL-II-CAPITAL-ADEQUACY-REGULATIONS -- THE-CREDIT-CRISIS-CAUSE-OR-CURE/
Risk-based capital guidelines; capital adequacy guidelines; capital maintenance: Asset-backed commercial paper programs and early amortization provisions. (2003, October).
Retrieved November 8, 2009 at http://www.bankinfosecurity.com/html/risk-based-baselii-meeting-summary.html
To solve these emerging needs of the company to satisfy the demand in the market, it is necessary to invest into expanding of the services offered and shifting the existing concept of the club. Firstly, it is necessary to expand the space occupied by renting out additional premises and organizing Spa procedures there. This will require also investment into necessary human resources, such as hiring Spa administrative and consultants specialists offering services for both women and men, and for both facials and body treatment to maximize the services mix. Costs for occupying this space, purchasing necessary equipment and hiring adequate staff so can exceed the current costs by ?450,000, so this is the incremental expense from proceeding with this services expansion programs. Cost to organize the fitness and Spa cafe, which is proposed to call at EnerGi Box, will amount to another ?100,000 annually. The final improvement step is investment…
Brayley, R.E., McLean, D. (1999). Managing Financial Resources in Sport and Leisure Service Organizations, Sports Publishing.
Mitchell, D. Coles, C. (2004) Establishing a continuing business model innovation process, Journal of Business Strategy, 25 (3), pp. 39-49.
D. Mitchell, C. Coles, Establishing a continuing business model innovation process, Journal of Business Strategy, Volume 25, No. 3, 2004, pp. 39-49.
ith a strong customer and employee basis, the company envisions taking early leadership of the global market. This is also to be based upon management excellence on a local scale. The management team is envisioned to be capable of translating vision into performance on both a local and global scale, while also investing strategically to maximize profitability and performance.
d. In terms of Research and Development, Applied Materials has increased its investments despite economic downturns. The purpose of this was to increase its potential future profitability by providing advanced manufacturing systems for its customers worldwide. This proved to be a good strategy, as the company had build a broad product line that catered for nearly every chip manufacturing stage. In order to reach the next step; integrating systems to perform a specific process sequence, a new facility was needed, and 1997 saw the beginning of construction on the Equipment and…
With a strong customer and employee basis, the company envisions taking early leadership of the global market. This is also to be based upon management excellence on a local scale. The management team is envisioned to be capable of translating vision into performance on both a local and global scale, while also investing strategically to maximize profitability and performance.
d. In terms of Research and Development, Applied Materials has increased its investments despite economic downturns. The purpose of this was to increase its potential future profitability by providing advanced manufacturing systems for its customers worldwide. This proved to be a good strategy, as the company had build a broad product line that catered for nearly every chip manufacturing stage. In order to reach the next step; integrating systems to perform a specific process sequence, a new facility was needed, and 1997 saw the beginning of construction on the Equipment and Process Integration Center (EPIC).
EPIC represents the first facility of its kind in the semiconductor industry, in its capacity as a dedicated 200mm pilot line integration facility. Specifically, the Center enables the company's customers to make their technology transitions with greater speed and ease. To do this, the Center enables them to evaluate and integrate new manufacturing systems in advance of installing these. This provides the company with an important leading edge in the global marketplace. To accomplish this was a challenge on multiple levels that did not end with the Center opening its doors in 1998. Indeed, in order to adhere to its central aims, engineers for the center had to effectively implement systems by which they could set up their systems as often as once per month and make quick modifications according to differing requirements.
It is important to keep paid-in capital separate from earned capital (retained earnings) because they are two different forms of capital. For the investor, it is important to understand the differences between the two. Paid-in capital is the capital that the stockholders have paid into the business. Earned capital is the capital that has accumulated from the firm's earnings (Kieso, eygandt and arfield, 2007). Thus, the latter is a measure of how much money the firm has made while the former is a measure of how much money the firm has raised.
It is important to keep these two forms of capital separate because they derive from two different activities. On the cash flow statement, for example, paid-in capital would be a financing cash flow while earned capital would be a combination of operating and investing flows. By maintaining a clear distinction between the two, the exact nature…
Kieso, D.E., Weygandt, J.J., & Warfield, T.D. (2007). Intermediate accounting, (12th ed.). Hoboken, NJ: John Wiley & Sons.
There are many firms that exist and operate within the capital management realm. Some companies operate and expand via their internal income and operations. There are other firms that are not currently self-solvent. However, the latter is commonly able to expand through capital investment and fundraising. The goal with such firms, of course, is to ramp up business levels, pricing structures and so forth so as to get to a profit at some point, even if it takes a few years. Indeed, many firms start off relying on capital investment and resource allocation at first and then become able to expand organically with no outside support, budgeting or investment. While firms like Amazon are a behemoth right now, there was a time where their operations and capital structures were quite thin internally and thus they needed a lot of investment and support through the capital investment and budgeting process.
One of the biggest differences between new capital projects and renewal/replacement projects is that the variables are less known. The cash flow for the next few years is subject to a higher degree of uncertainty, but so too is the risk profile for the project. The latter is especially important when the project is in an entirely new business, and the firm has very little concrete information to go on. The reality is that for renewal projects, there is a lot more certainty about everything, and that makes a difference in the capital budgeting process because the numbers are more reliable and the company knows that the discount rate appropriately reflects the risk associated with that project. It must be cautioned, however, to remember that incremental cash flows only should be incorporated into the calculation for renewal projects, not money that has already been committed to the project (Investopedia,…
Investopedia (2016). Applying NPV analysis to project decisions. Investopedia. Retrieved July 19, 2016 from http://www.investopedia.com/ exam-guide/cfa-level-1/corporate-finance/applying-npv-net-present-value-project-decisions.asp' target='_blank' REL='NOFOLLOW'>
There are only a couple of key assumptions used in the creation of the NPV data. First, with respect to fixed costs, the wording "will increase by 3.8% over the life of the project" is ambiguous. We need an actual figure for each year. It is assumed therefore, in the interests of being conservative, that the word "annually" was accidentally omitted and fixed costs will increase 3.8% each year over the life of the project.
The sunk costs, it must be stated, were omitted from this calculation as they are not an incremental cash flow (Investopedia, 2015).
There is nothing stated about the return of working capital at the end of the project, so it is assumed that this money vanishes into the ether at the end of the project, because returning it would substantially increase the value of the project. Whether the working capital is returned at…
Fernandez, P., Ortiz, A. & Acin, I. (2015) Discount rate (risk free rate and market risk premium) used for 41 countries in 2015: Survey. IESE Business School. Retrieved December 4, 2015 from http://faculty.mccombs.utexas.edu/keith.brown/AFPMaterial/FernandezEtAl%20WP-Global%20ERP-4.23.15.pdf
Investopedia (2015). Complete guide to corporate finance. . Investopedia. Retrieved December 4, 2015 from http://www.investopedia.com/ walkthrough/corporate-finance/4/capital-investment-decisions/incremental-cash-flows.aspx' target='_blank' REL='NOFOLLOW'>
Your calculated WACC. ( Market value of equity and debt are given in thousands)
Expected return on the market
Market value of equity
Market value of debt
Marginal Tax ate
Percentage of Debt
in capital structure
Percentage of Equity
in capital structure
Cost of Equity = 8.80%
Capital Asset Pricing Model Formula (Cost of Equity)
F + Beta (Market isk Premium)
Cost of Debt Formula
isk Free ate + Credit Spread
Cost of Debt= 5.0%
Weighted Average Cost of Capital (WACC)
Cost of debt (1- tax rate) * Percentage of debt + Cost of Equity* Percentage of equity
How data was used to calculate WACC. This would be the formula and the formula with your values substituted.
WACC = (E/E+D) rE + D/(E+D) rD (1-TC)
(5% * (1- .4)) * 14.29% + (8.80%* 85.71%) = 7.971%
Sources for your data
Sources of the…
1) Cheremushkin, Sergei Vasilievich (December 21, 2009). "How to Avoid Mistakes in Valuation -- Comment to 'Consistency in Valuation: A Practical Guide' by Velez-Pareja and Burbano-Perez and Some Pedagogical Notes on Valuation and Costs of Capital."
2) Frank, Murray; Shen, Tao (2012). "Investment, Q, and the Weighted Average Cost of Capital"
Kohls is a well-known department store with a head office based in Wisconsin (Kohls, 2016). To assess the financial performance of the organisation, including its cost of capital, the latest set of available accounts were utilise, this was the 10k issued in 2016, four financial year ending 31 December 2015 (Kohls, 2016). The paper starts by examining the cost of capital for the organisation, and then considers the value of its operations.
Cost of Capital
Capital within any organisation is made up of two elements; debt and equity. Debt consists of money that has been borrowed from third parties, which will need to be repaid (Howells and Bain, 2007). Debt may be short or long-term, with the borrower paying interest and/or fees for the use of money from a third party (Elliott and Elliott, 2015). Generally, the higher the level of proportional debt carried by phone, the greater…
Bodie, Z., Kane, A. and Marcus, A. J. (2014) Investments. London: McGraw Hill Higher Education.
Drury, C. (2015) Management and Cost Accounting. London: Cengage Learning.
Elliott, B. and Elliott, J. (2015) Financial Accounting and Reporting. London: Pearson.
Howells, P. G. A. and Bain, K. (2007) Financial Institutions and Markets. London: Longman.
This would involve winding down investment banking to focus on venture capital. A second option is to start a fund in Russia, with local partners there, to capitalize on that country's telecommunications market. The company could be split under the second scenario into three different divisions. The third option is to retain the status quo, which has generally been successful, but offers limited upside compared to the other options.
t is recommended that the first option be undertaken. There are a few good reasons for this. The third option offers limited upside. As the up-front cost of technology increase for telecommunications providers, Columbia's principles are going to be increasingly unable to meet the capital requirements. So this option is superior to the status quo. The investment banking option can be cut, but do not feel that it needs to be, especially when the second option involved hiring professional management to…
It is recommended that the first option be undertaken. There are a few good reasons for this. The third option offers limited upside. As the up-front cost of technology increase for telecommunications providers, Columbia's principles are going to be increasingly unable to meet the capital requirements. So this option is superior to the status quo. The investment banking option can be cut, but I do not feel that it needs to be, especially when the second option involved hiring professional management to run the investment banking arm.
The second option, overall, is too complex to be executed right now. Columbia has been successful because the principles have expertise the subject area and take a hands-on approach. They are the classic "value-added" venture capitalists, whose input dramatically increases the value of the investment. Operating in Russia or South America takes the principles outside of their comfort zones. Within a couple of days of this meeting, the risks inherent in Russia will become apparent, and even if the partners wanted to invest in Russia they would have scrapped the program on account of the financial crisis. South America, of course, had its own financial crisis in 1999.
The instability of the emerging markets, and the lack of familiarity of the principles with these markets means that they are taking on far too much risk. In addition, there are the risks associated with moving from a simple, flexible organizational structure to one characterized by complexity, joint ventures, uncertain chains of command and investments in businesses the principles have little experience with. Thus, the second option is too risky. Under the first option, the principles can make one or two strategic investments overseas to move slowly along the learning curve. It is recommended, therefore, that Columbia accept outside capital in order to facilitate growth, but also as retain control of the company and provide more opportunities to the younger partners.
Capital One has a good position in the Canadian and British markets. The international credit card business accounts for 11.3% of total revenue in the credit card operating segment (2009 Capital One Annual Report). Capital One does not have retail banking in Canada but does have it in the UK, although that part of the business is relatively minor. In credit cards, the UK business declined 14.6% in 2009 while the Canadian business increased 9.8%, reflecting the states of those two respective economies during the downturn.
The recent acquisitions by Capital One fit well within the company's strategy. Capital One has maintained its monoline focus on consumer lending with its expansion into retail banking. In addition, the company has expanded slowly, giving its management time to absorb the new banks and gain the knowledge and experience needed to increase the pace of such expansions in the future.…
Capital One 2009 Annual Report. Retrieved May 16, 2010 from https://materials.proxyvote.com/Approved/14040H/20100301/AR_55174/HTML2/capital_one-ar2009_0002.htm
MSN Moneycentral:: Capital One. (2010). Retrieved May 16, 2010 from http://moneycentral.msn.com/detail/stock_quote?Symbol=COF
O'Hara, T. (2005). Capital One to buy New Orleans bank. Washington Post. Retrieved May 16, 2010 from http://www.washingtonpost.com/wp-dyn/articles/A12268-2005Mar6.html
Schultz, J. (2010). What the credit card act means for you. New York Times. Retrieved May 16, 2010 from http://bucks.blogs.nytimes.com/2010/02/22/what-the-credit-card-act-means-for-you/
capital purchase, costing $5,000, company benefit . Examples include a X-ray machine, MI processor, software filing patient records, a research library, large item company . o Identify management goals expenditure support
The health care field is becoming presented with more and more pressures in today's society. There are numerous changes in the social and economic environments, which become combined to generate new pressures for the health care providers. The life expectancy of the population increases, generating increased needs for medical care for several years. Then, the Baby Boomers are retiring, causing a demanding generation, used to financial resources and access to services, to turn to the medical care sector for more services. The policies regulating the field also change as do the demands and expectations of patients.
In such a context, the health care institutions find themselves in a position in which they have to be better managed…
Brown, M., 1992, Health care information: strategy, structure and process, Jones & Bartlett Learning
Daft, R.L., 2009, Organizational theory and design, 10th edition, Cengage Learning
Finkler, S.A., Ward, D.M., Calabrese, T., 2011, Accounting fundamentals for health care management, 2nd edition, Jones & Bartlett Publishers
2012, Absolute Medical Equipment, http://www.absolutemed.com/Medical-Equipment/MRI-Machines last accessed on June 29, 2012
" (Kinnunen, 2004) the work of Kaplan and Schroar (2003) states findings that the past performance is highly relative to capitals flows to private equity funds.
The work of Mishra, Kemmerer, and Shenoy entitled: "Managing Venture Capital Investment Decisions: A Knowledge-ased Approach" relates the building of a causal map of the investment decision through use of interviewing venture capitalists and then converting this information into a "causal ayes net" which are stated to be "especially suited for domains characterized by a high degree of uncertainty." (Mishra, Kemmerer, and Shenoy, 2001) This technique has also been utilized in developing artificial intelligence and even used "in medical diagnosis, modeling portfolio risk and return, and new product development..." And are based on "probability theory." (Mishra, Kemmerer, and Shenoy, 2001) This method is reported to be one that increases the likelihood of gaining an understanding of the decision-making process of Venture Capitalists (VCs) and…
Kaplan, S. & Schroar, a. 2003. Private Equity Performance: Returns, Persistence and Capital Flows. MIT Sloan Working Paper No. 4446-03; AFA 2004 San Diego Meetings.
Cochrane, John H. The Risk and Return of Venture Capital. Working paper, University of Chicago, 2001.
Kinnunen, Harri (2004) Institutional Investor's Decision Making Criteria for Investing in Venture Capital Funds. Frontiers of E-Business Research 2004. Online available at http://www.ebrc.info/kuvat/695-709_04.pdf
Patel, Pankaj and D'Souza, Rodney (2008) Uncovering Knowledge Structures of Venture Capital Investment Decision Making. A Working Paper for SBA Office of Advocacy. Jan 2008. Online available at http://www.sba.gov/advo/research/rs315tot.pdf
Capital Accounting and Budgeting Questions
When a firm has different potential projects or investments, they will want to assess their options to ensure they make the best choice. However, comparing different types of projects or investments can be difficult, especially if the projects have different terms to maturity and/or different risk profiles. A useful tool is that of net present value (NV). Net present value allows different types of project to be compared on a like for like basis.
The net present value calculation takes all of the forecast future net cash flows of a project (the revenue less all the costs), and then discounts them into today's value. The discounting allows the firm to assess what the value of the future cash flows will be in today's money. The rate of discount applied will usually be the cost of capital for the firm, but where there is…
Political risk manifest in a number of ways, they may be in the policies and laws that a government enacts, political instability and even aspects such as competition regulations. These will all impact on the potential level of risk associated with an investment. When undertaking capital budgeting, for a project to be viable, where there is an additional risk it is necessary for there to be a risk premium to justify taking that additional risk. The introduction of different types of policies, regulation or laws by government, may impact on the overall value of an investment, and in some cases may be severely detrimental. For example, in some countries there may be a risk of nationalization which the company may lose a significant amount of its investment (Mintzberg et al., 2008). Likewise, the amount of value in investment may create, especially if it is targeting markets, will be impacted by the competitive conditions, which in turn influenced significantly by government policies and attitudes.
Transfer pricing refers to pricing of internal transactions, for example when goods are sold by one company to another company in the same group, or possibly transfers between divisions. When undertaking capital budgeting, the potential benefits and risks associated with transfer pricing will need to be considered. A project may be viable due to the economies which can be gained from in-house, or in group supply. Likewise, the potential benefits may also be limited in terms of national regulation and the way in which transfer pricing is controlled. Transfer pricing will impact on the costs and potential profits that are assessed when examining potential investments or projects. The security of the
The partners are directly responsible financially for the obligations of the business. Therefore, in case of loss or debts, the owners suffer the risks and losses since they have liability for the business. In terms of complexity and flexibility, the partnerships remain appropriate for the partners. The issue of raising finance is shared between the partners; however, they cannot get loans for the business independently. Therefore, they are not suitable for the two partners who wish to set their business.
The third venture is a corporation, which is a separate entity from the persons that establish the business. Therefore, in financial terms, they are easy to raise capital as members contribute, and can borrow finance independently. Like the limited liability partnership, they are legally bound and hence the liability is limited. They eliminate the issue of personal liability. The tax returns are similar to those of partnerships and are taxed…
Graubner, M. (2006). Task, firm size, and organizational structure in management consulting an empirical analysis from a contingency perspective. Wiesbaden, Deutscher UniversitSts-Verlag. http://site.ebrary.com/id/10231907 .
Spadaccini, M. (2007). Business structures. Irvine, CA, Entrepreneur Press.
Douglas, a. (2009). Partnership working. Milton Park, Abingdon, Oxon, by Routledge. http://site.ebrary.com/id/10258056 .
Grandori, a. (2006). Corporate governance and firm organization microfoundations and structural forms. Oxford, Oxford University Press.
Corporation business structures
Preference of Corporation Business Structure Over Other Known Structures
In this paper, we will choose the corporation business structure as an ideal choice for the firm McDonalds in order to carry out its operations. We will define the merits which a multinational firm like McDonalds can take advantage of if because of this structure, also we will have an in-depth look on other structures such as sole proprietorship and partnership and focus on their strengths and weaknesses.
eview of Sole Proprietorship and Partnership
Let's review the structure of sole proprietorship first, it is regarded as one of the least expensive and easiest way to start any business as compared to corporative and partnership structure. Here the overall business as well as the business owner is viewed legally as a same entity. This however has its own disadvantages which in our chosen case of McDonalds could…
Swann, P. (1993). Corporate Vision and Rapid Technological Change. New York: Routledge.
On top of this, it's important to remember that FDI inflows to the LDCs are highly concentrated geographically: four petroleum-producing LDCs - Angola, Chad, Equatorial Guinea and Sudan - received more than half (56%) of the total FDI inflows going to all 50 LDCs in 2000-05 (United Nations Conference on Trade and Development, 2007).
LDCs are riskier investments than emerging countries. Emerging countries show signs of advancement in their financial structures - banks, stock markets, regulatory bodies, and have reached a certain level of maturity in terms of depth, breadth and liquidity in its financial structure and economy as a whole (What is the distinction between less developed and emerging markets?). Less developed countries, on the other hand, have not yet reached this stage of financial and economic development.
OCO Global. http://www.earthtimes.org/articles/show/global-foreign-direct-investment-grows-to-almost-1-trillion-in,301274.shtml
Foreign direct investments in 2007. EconomyWatch. http://www.economywatch.com/foreign-direct-investment/2007.html
United Nations Conference on Trade and Development. http://www.unctad.org/Templates/webflyer.asp?docid=8624&intItemID=4431&lang=1…
OCO Global. http://www.earthtimes.org/articles/show/global-foreign-direct-investment-grows-to-almost-1-trillion-in,301274.shtml
Foreign direct investments in 2007. EconomyWatch. http://www.economywatch.com/foreign-direct-investment/2007.html
United Nations Conference on Trade and Development. http://www.unctad.org/Templates/webflyer.asp?docid=8624&intItemID=4431&lang=1