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    Capital Structure Decision and Cost of Capital

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    In simple words, the capital structure is the combination of debt and equity used to finance a company. The background readings of this Module provide plenty of information regarding both the issue of the capital structure decision and the concept of the weighted average cost of capital.

    1) For the Module, please lookup the following three companies' data:

    eBay (NasdaqGS: EBAY),
    The Clorox Company (NYS: CLX), and
    Alaska Air Group, Inc. (NYS: ALK)

    Write a 5 page report by responding to the following:

    1) Based on the readings, please include the information together with other information that you think is necessary to below questions:
    a. The nature of the business in brief (all three companies)
    b. Total current assets and long-term assets of all three companies
    c. Total current liabilities and long-term liabilities of all three companies
    d. Revenue of each company
    e. Total debt/equity ratios of all three companies
    f. Profit margin, return on assets, and return on equity ratios of all three companies
    g. Betas of all three companies
    h. The riskiness of all three companies in brief (e.g., the higher the beta, the higher the risk)
    i. The advantages and disadvantages of debt over equity financing.

    2) What do you perceive you have learnt in the Module? Which of the following learning objectives mastered?
    -Explain and demonstrate the use of bonds and other debt instruments in financing the firm's capital plans
    -Discuss the advantages and disadvantages of debt financing and of equity financing
    -Identify and discuss the concept of optimal capital structure

    Note: Describe the purpose of the report and conclusion.


    Alaska Air Group, Inc. (2012). Investor relations. Retrieved May, 2012, from http://phx.corporate-ir.net/phoenix.zhtml?c=109361&p=irol-IRHome

    To access company background information, ratios analysis (e.g., debt/equity ratio, profitability ratios, etc.), and other information (e.g., company beta), please use the following websites: http://ca.finance.yahoo.com/q?s=ALK&ql=1; http://ca.finance.yahoo.com/q/ks?s=ALK.

    The Clorox Company (2012). Investors. Retrieved May, 2012, from http://investors.thecloroxcompany.com/

    Crfonline.org (n.d.). Ratios and formulas in customer financial analysis. Retrieved November 19,
    2012, from http://www.crfonline.org/orc/cro/cro-16.html

    Damodaran, A. (2005). Finding the right financing mix: The capital structure decision. Retrieved
    November 20, 2012, from
    Ebay Inc. (2012). Investor relations. Retrieved May, 2012, from http://investor.ebay.com

    Peavler, R. (2012). Debt and equity financing. Retrieved November 20, 2012, from

    Welsh, I., (1996). A premier on capital structure. The John E. Anderson Graduate School of
    Management, University of California, Los Angeles. Retrieved November 20, 2012, from

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    Solution Preview

    Please see the attached.

    A firm uses different types of financing to pursue its goals and for smooth operations. The combination of different financing options is called capital structure and consists of long-term debt, preferred stock, and net worth. Most companies raise funds by means of equity or debt. Debt comes in the form of long-term notes payable or bonds whereas equity comes in the form of common stock, preferred stock or retained earnings. Both means of financing have advantages and disadvantages. The main objective of any firm is maximizing shareholders' wealth. For this there are several issues which are determined and have to be managed by reaching at a point of optimal capital structure. As a result financial managers thrive to attain an optimal mix of equity and debt in the firm's capital structure.
    The proportion of each category of capital is called weight of capital. All capital sources like common stock, preferred stock, bonds, and any other long-term debt are used in calculation of weighted average cost of capital. WACC is calculated by multiplying cost of each capital component with its proportional weight and then summing.
    This report provides capital structure information of eBay, The Clorox Company, and Alaska Air Group and calculates critical ratios which determine profitability of these companies.
    a. Company Information
    eBay: With a customer base of more than 100 million, eBay is the world's largest online marketplace where anybody can buy and sell practically anything. The company was founded in 1995 and since then has been connecting a diverse and passionate community of individual buyers and sellers as well as small businesses.
    Clorox Company: Clorox is a global company with leading brands ...

    Solution Summary

    The solution discusses the capital structure decision and cost of capital.