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Capital structure decision and the cost of capital

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Balance Sheet and Market Value of Raytheon Liabilities and Equity

Refer to Raytheon most recent balance sheet. Review the "liabilities and equity side" of the balance sheet.

(a) Short term liabilities (or debt) and long term liabilities

Find out from the balance sheet of the company the total of the short term liabilities (also called 'short term debt') and long term liabilities (also called 'long term debt')

(b) Equity

The market value of equity is by definition equal to the number of shares outstanding times the market price per share. Find out the number of shares outstanding and the recent price per share. Then multiply one by the other in order to find the market value of equity of your company. If you have a problem finding out the number of shares outstanding you may go to http://finance.google.com and insert the name of your company. The market value of equity of your company is what is called 'Mkt Cap' (that is, Market Capitalization) that is market capitalization. An alternative site is http://finance.yahoo.com where again you insert your company's name and get the market capitalization.

Once you have this information, prepare a two to three page paper with the following:

1. Compute the debt ratio of Raytheon (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 Raytheon 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 your SLP company. 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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Solution explains the capital structure decision and the cost of capital

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1. Compute the debt ratio of raytheon (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.

Debt ratio= Total liabilities/ ( Total Liabilities + Equity)
= 9570/(17150 + 9570)
=0.36

Debt Equity ratio= Total liabilities/ Equity
= 9570/(17150)
=0.56

Ratios ...

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