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Analysis of capital structure

See the attached file.

Demonstrate with calculations and financial data the questions below:

The ADT Corporation (TYCO)
1. What are the operating risks of the company?
2. What is the financial risk of the company (the debt to total capitalization ratio)?
3. Does the company have any preferred stock?
4. What is the capital structure of the company?
Short term portion of Long Term Debt, Long Term Debt, Preferred Stock (if any), and market value of Common Stock issued and outstanding?
5. What is the company's current actual Beta?
6. What would the Beta of this company be if it had no Long Term Debt in its capital structure? (use the Hamada Formula)
7. What is the company's current Marginal Tax Rate?
8. What is the Cost of Debt, before and after taxes?
9. What is the Cost of Preferred Stock (if any)?
10. What is the Cost of Equity?
11. What is the cash dividend yield on the Common Stock?
12. What is the Weighted Average Cost of Capital of the company?
13. What is the Price Earnings Multiple of the company?
14. How has the company's stock been performing in the last 5 years?
15. How would you assess the overall risk structure of the company in terms of its Operating Risks and Financial Risk (Debt to Capitalization Ratio)?
16. Would you invest in this company? Why? Or Why not?

http://media.corporate-ir.net/media_files/irol/11/112348/TYC_%20ADT_Corporation_Form_10.pdf.

Attachments

Solution Preview

Please see the attached files for your tutorial.

Note that the data used to compute the following is the one for the nine months ended June 30, 2012 which is the latest disclosure.

1. What are the operating risks of the company?
Operating risk is defined as that associated to a company's operating cost structure with focus on how the firm utilizes fixed costs, as opposed to variables costs, in its operations. This mix of fixed and variable costs are severely affected by environmental, social and government factors which in turn affects the firm's ability to generate profit, hence the operational risk increases the higher the level of a company's fixed costs in an uncertain environment.

For ADT, these operating risks can be further studied in the company's Form 10 particularly on Pages 11 and 63.

An example of operating risks as stated by ADT is "We sell our products in highly competitive markets, which results in pressure on our profit margins and limits our ability to maintain or increase the market share of our products." This inability to raise prices increases the firm operating risks since higher prices can mean fixed costs can be recouped faster from contribution margins.

2. What is the financial risk of the company (the debt to total capitalization ratio)?
Total long term debt = $2,525 million
Total Assets = $9,683 million
Financial risk = $2,525 million/$9,683 million = 26.08%

Financial risk is the risk associated with the variability of a company's income as a result of its fixed financing costs, hence the above formula only includes debt which is interest bearing. Fixed financial costs, if you remember, exacerbate the changes in operating profit on net income and on the earnings per share data.

3. Does the company have any preferred stock?
If you check the Unaudited Pro Forma Condensed Combined Balance Sheet dated June 29, 2012 in page 59 for the data, you can see under the Shareholders' Equity section that there are no Preferred Stocks.

4. What is the capital structure of the company? (Short term portion of Long Term Debt, Long Term Debt, Preferred Stock (if any), and market value of Common Stock issued and outstanding?
To compute for the market value ...

Solution Summary

The solution provides an analysis of capital structure.

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