The capital structure decision and the cost of capital for Ford, Disney, and Electronic Arts
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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.
Using Ford, Disney, and Electronic Arts, discuss the business nature of each. What are each of the company's beta?
Upon reviewing the nature of the operations of the companies including the nature of their customers and products, what would you recommend should the capital structure (total liabilities or debt and equity proportions) be for each of the three companies? You don't have to give specific numbers.
What would you recommend for each company? Consider the nature of their business, the riskiness of the company, and the advantages and disadvantages of debt over equity financing in your answers.
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Solution Summary
The cost of capital for Ford, Disney and Electronic Arts are examined.
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Ford Company:
- this is an automaker and is an American multinational company.
- Beta=2.45 as of Oct 22, 2010.
Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. A beta of 1 indicates that the security's price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market.
Nature of Ford's customers and products.
- The nature of Ford's customers has been for a long time been the "all-American" brand loyal client. Being one of the oldest and largest car makers in the world, it's customers have a staunch belief that by buying "Ford", they reinforce their patriotism and support of the local manufacturing companies.
- The nature of Ford's products has primarily been in "strong, working cars and trucks". Ford and its subsidiaries also engage in other businesses, including financing vehicles. It operates under two segments: Automotive and Financial Services. The Automotive segment includes the operations of Ford North America, Ford South America, Ford Europe, Ford Asia Pacific Africa and Volvo. The Financial services include the operations of Ford Motor Credit Company and Other Financial Services.
What would you recommend should the capital structure (total liabilities or debt and equity proportions) be for Ford?
I would recommend a low-debt ratio for the company. This is because the firm already has very high ...
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