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Finance Companies

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Considering the following three companies:
i) eBay
ii) The Clorox Company (CLX)
iii) Alaska Air Group, Inc. (NYS: ALK).

Upon reviewing total debt/equity ratios, company betas, profitability ratios, company revenue, assets, and liabilities, and the nature of the operations of the companies including the nature of their customers and products, what would you recommend should be the capital structure (total liabilities or debt and equity proportions) for each of the three above companies?

Include information such as:
- The nature of the business in brief of all three companies.
- Total current assets and long-term assets of all three companies.
- Total current liabilities and long-term liabilities of all three companies.

Revenue of each company:
- Total debt/equity ratios of all three companies.
- Profit margin, return on assets, and return on equity ratios of all three companies.
- Betas of all three companies.
- The riskiness of all three companies in brief (e.g., the higher the beta, the higher the risk).
- The advantages and disadvantages of debt over equity financing.

Part II:
1) Compute the debt ratio of your company (total liabilities divided by the total liabilities plus equity) and the debt to equity ratio, (total liabilities divided by total equity). Also, show these two ratios for short-term liabilities only and for long-term liabilities only (instead of total liabilities use just short-term liabilities and long-term liabilities). Show all of your work and calculations.
2) Give your recommendations as to whether or not you consider these ratios to be too small or too large. Should Lowes increase its debt or take steps to pay off its debt?
3) Compute the debt to equity ratios to two other companies in the same industry as Lowes. Which of these three companies has the highest debt to equity ratio, and why do you think it chose to have a relatively high ratio? Which of these three companies has the lowest debt to equity ratio, and why do you think it chose to have a relatively lower ratio?

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The answer to this problem explains Finance Companies. The references related to the answer are also included.

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Part 1: (Please see the attached table)
EBAY is an online auction and shopping website that enables people and businesses to buy and sell a variety of goods and services all over the world. It uses a consumer to consumer business model. It has operations in more than thirty countries. A large number of items such as equipment, computers, and appliances are bought and sold every day. It also has categories for industrial surplus, and services. Only those items that are listed in the eBay Prohibited and Restricted items policy are not allowed on the website.

The company has strong financial growth. Its net income has increased from $348.25 million in 2007 to $3,229 million in 2011. Its debt equity ratio is 0.23 however; its industry debt equity ratio is 0.16. Its long term debt has increased from $1,518 million in 2010 to $4,506 million in 2011. This is a sudden increase in long term debt. Of the three companies considered, the riskiness of eBay, is the highest. Its Beta is 1.47. High beta increases the cost of equity capital. Debt capital has its own problems. It places a stress on the cash flows of the company. The higher debt increases the financial risk of eBay. Any default can lead to steep late fines, taking possession of collateral, or calling the loan due urgently. Moreover, defaults can allow the lenders to file for bankruptcy against eBay. The recommended capital structure, debt equity ratios should be lower than what it is presently. It should be 0.20. This will reduce its financial risk and still provide it with adequate capital to finance its current projects.

The Clorox Company makes food and chemical products. It owns some popular brands such as, Formula 409 surface cleaner, Liquid-Plumr drain cleaner, Brita water filtration system, and KC Masterpiece salad dressings and sauces. The Clorox Company is best known for Clorox bleach. The company has been censured for making overstatements in advertisement, sexism in commercials, and false claims in advertisements. The Clorox ...

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  • MBA, Eastern Institute for Integrated Learning in Management
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