Structure and Returns

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Structure and Returns

Resources

This week you will examine your company to measure investment returns, capital structure choices, and optimal capital structure.

Assignment Preparation

You will find helpful information in the following resources:

  • Principles of Corporate Finance Companion Web site (linked in the Resources). Choose Chapters 17, 18, and 19 from the drop-down list and click on “Beyond the Page.
  • Capital Structure Choices: To find the breakdown on the types of securities and financing that your company has outstanding, check the footnotes on the 10-K report located on the SEC’s Filings and Forms (EDGAR) Web site, linked in the Resources. To get the other inputs needed for the analysis, you should check the historical financials on the firm.
  • The Optimal Financing Mix: To get the inputs needed to estimate the optimal capital structure. examine the 10-K report located on the SEC’s Filings and Forms (EDGAR) Web site. You can get a list of the comparable firms on the Yahoo Finance Web site, linked in the Resources.

Use the following questions to guide your research and analysis.

Measuring Investment Returns

  • Is there a typical project for this firm? If yes, what would it look like in terms of life (long term or short term), investment needs and cash flow patterns?
  • How good are the projects that the company has on its books currently?
  • Are the projects in the future likely to look like the projects in the past? Why or why not?

Capital Structure Choices

  • What are the different kinds or types of financing that this company has used to raise funds? Where do they fall in the continuum between debt and equity?
  • How large, in qualitative or quantitative terms, are the advantages to this company from using debt?
  • How large, in qualitative or quantitative terms, are the disadvantages to this company from using debt?
  • From the qualitative trade off, does this firm look like it has too much or too little debt?

Optimal Capital Structure

  • Based upon the cost of capital approach, what is the optimal debt ratio for your firm?
  • Bringing in reasonable constraints into the decision process, what would your recommended debt ratio be for this firm?
  • Does your firm have too much or too little debt:
    • Relative to the sector?
    • Relative to the market?

If you have any questions about this course project, please contact your course instructor.

Submit your research and analysis to the assignment area when complete.

Note: Your instructor may also use the Writing Feedback Tool to provide feedback on your writing. In the tool, click the linked resources for helpful writing information.