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Toyota - Raising Funds to Meet Recall Cash Requirements

Toyota Motor Corp, the world's second largest auto maker, has a big problem. At the end of May, 2006 the company announced a recall affecting roughly one million of its vehicles world wide. The problem has to with the steering mechanism of the affected vehicles that could fail under pressure and cause drivers to lose control. Toyota has refused to disclose the full cost of this recall.

Further financial information and news releases about Toyota can be found on their web site or go to finance.Yahoo.com and then click in succession on the headings: finance, industries, auto manufacturers, Toyota Motor, key statistics, balance sheet, Annual Data
Make the following assumptions. Toyota will need approximately $925 million in order to take care of the full cost of this recall. This sum needs to be raised so that the company has this additional cash to support the manufacturing of the new parts, their global distribution, the dealers' costs of contacting the affected customers and then making the replacement plus the public relations and advertising campaigns needed to stress the reliability and safety of Toyota vehicles.

You should also assume that the current cash, accounts receivables and other current assets (all listed in the Balance Sheet) are all committed to current operations.

As a senior financial manager, I need to recommend the best sources for this $925 million in a five page paper. Be specific on the amount to be raised from each source and justify both your selection of each source as well as the amount you intend to raise from this source. Do not overlook the issue of debt/equity balancing.

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Toyota Motor Corp, the world's second largest auto maker, has a big problem. At the end of May, 2006 the company announced a recall affecting roughly one million of its vehicles world wide. The problem has to with the steering mechanism of the affected vehicles that could fail under pressure and cause drivers to lose control. Toyota has refused to disclose the full cost of this recall.
Further financial information and news releases about Toyota can be found on their web site or go to finance.Yahoo.com and then click in succession on the headings: finance, industries, auto manufacturers, Toyota Motor, key statistics, balance sheet, Annual Data
Make the following assumptions. Toyota will need approximately $925 million in order to take care of the full cost of this recall. This sum needs to be raised so that the company has this additional cash to support the manufacturing of the new parts, their global distribution, the dealers' costs of contacting the affected customers and then making the replacement plus the public relations and advertising campaigns needed to stress the reliability and safety of Toyota vehicles.
You should also assume that the current cash, accounts receivables and other current assets (all listed in the Balance Sheet) are all committed to current operations.
As a senior financial manager, I need to recommend the best sources for this $925 million in a five page paper. Be specific on the amount to be raised from each source and justify both your selection of each source as well as the amount you intend to raise from this source. Do not overlook the issue of debt/equity balancing.

Toyota's long-term success depends upon the firm's investments earning a sufficient rate of return. This sufficient or minimum rate of return necessary for a firm to succeed is called the cost of capital.
The cost of capital can also be viewed as the minimum rate of return required keeping investors satisfied.
Thus the objective of the capital structure management is that mixture of debt and equity than minimizes its weighted average cost of capital (WACC).
Toyota has to optimally utilize the sources of finances which broadly are equity and Debt Apart from the risk associated with a firm's fundamental operations known as operating risk, risk can be introduced by the use of financial instruments with fixed payments, more commonly known as debt. Thus the advantage of taking debt is its lower cost, no share in profits. The limitation is that it increases financial risk. The factors to take into account to determine optimal debt ratio include:
? The Volatility of Revenues?firms with stable revenue streams can safely use a higher DFL to boost earnings.
? Asset Specificity (general purpose vs. specialized)?firms with general purpose assets can have a higher DFL
? Operating Leverage?firms ...

Solution Summary

This solution of 1,659 words uses Toyota's financial data from Yahoo to determine the factors to take into account for optimal debt ratio and looks at the advantages of raising shares and the disadvantage of equity. It also looks at other sources of raising finances and provides a recommendation for Toyota.

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