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Capital Structure of Ebay, Clorox and Alaska Air Group

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What would you recommend to be the capital structure (total liabilities or debt and equity proportions) for each of the three companies below:

i. eBay (NasdaqGS: EBAY)
ii. The Clorox Company (NYSE: CLX)
iii. Alaska Air Group Inc. (NYSE: ALK)

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Solution Preview

The term debt means the amount which is borrowed by the company. Let us understand the pros and cons:

Disadvantages of Debt financing or Advantages of Equity
1) Increases financial risk
Debt financing can lead to greater financial risk because of higher fixed interest costs and principle re payments. Hence Equity financing leads to less financial risk.
2) Pressure on Cash flows
There is a constant pressure to pay interest and principle which can lead to liquidity crisis. This situation is ...

Solution Summary

In 300+ words, the solution explains the advantages and disadvantages of debt and equity in order to come to a conclusion on the kind of capital structure to recommend for these 3 big companies. References included.

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See Also This Related BrainMass Solution

Capital Structure Decision and Cost of Capital

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.

References:

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
http://pages.stern.nyu.edu/~adamodar/pdfiles/cfovhds/capstr.pdf
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
http://bizfinance.about.com/od/generalinformatio1/a/debtequityfin.htm

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
https://cdad.trident.edu/Presentation.aspx?course=56&term=92&presentation=143.

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