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.
Consider three companies: Borders, Clorox, and Amazon. Reflect on the nature of the business of these three companies. You are recommended to also get to the web site of one company in each of these categories. You might also check what the beta of each of these companies is.
Based on the readings of the Module, and 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? Note that you are not asked to provide specific numbers, just 'low debt ratio', 'medium debt ratio' or 'high debt ratio'. (Do not quote the actual company's capital structure or their debt-to-equity ratios as per their balance sheet.)
Write a paper explaining your recommendations for each of these three companies. Consider the nature of their business, the riskiness of the company, and the advantages and disadvantages of debt over equity financing in your answers.
Case Assignment Expectations
In the grading of your assignment, you will be assessed on the following items:
1. The use of multiple references beyond just the links mentioned above. Those links are just to get you started, but your ability to do your own research beyond these two articles will be assessed.
2. Your ability to focus the paper from beginning to end on the precise assignment questions. Remember that the assignment question is not to provide the firm's actual capital structure, but rather your recommendation as to whether or not the firm should have a high, medium, or low debt ratio.
3. Your paper should include proper referencing, both with a bibliography and references within your text. See the two links on referencing in the syllabus page for more detail about referencing. These references should direct support your answers to the four main assignment questions.
**** Required Readings
Damodaran, A., (2005), Finding the Right Financing Mix: The Capital Structure Decision, Retrieved August 2009, from: http://pages.stern.nyu.edu/~adamodar/pdfiles/cfovhds/capstr.pdf
Welsh, I., (1996), A Primer on Capital Structure, The John E. Anderson Graduate School of Management, University of California, Los Angeles, retrieved August 2009.
This Chapter on the Capital Structure Decision is a very good overview. Try to grasp the key concepts. Focus on concepts that involve the trade offs between debt and equity. The chapter is an excellent review and it is really worth reading.
Gold, J., (2006), Reducing a Company's Beta- A Novel Way to Increase Shareholders Value, Journal of Applied Corporate Finance, , Vol. 18, No. 4 (Fall)
Harvey, C., (1995), The Capital Structure and Payout Policy, WWWFinance, Retrieved August 2009 from: http://www.duke.edu/~charvey/Classes/ba350/capstruc/capstruc.htm
Biger, N., (n.d.), Finance - A conceptual Approach, Butterworth, Chapter 8, Capital Structure, Cost of Capital and Taxes,
Arman, J., & Biger, N. (n.d.) Module 4 Comments
Taunus, P., (1997), An interview with Merton Miller, ("A CLASSIC"), Retrieved August 2009 from: http://www.dfaus.com/library/reprints/interview_miller_tanous/© BrainMass Inc. brainmass.com December 15, 2020, 6:38 pm ad1c9bdddf
About the companies
Borders, Clorox, and Amazon
Borders are book super store company. It has book, music and movie superstores and mall-based bookstores. As per moneycentral.com, "As of January 30, 2010, Borders operated 511 superstores under the Borders name, including 508 in the United States and three in Puerto Rico. It also operated 175 mall-based and other small format bookstores, including stores operated under the Waldenbooks, Borders Express and Borders Outlet names, as well as 29 Borders-branded airport stores. It has three segments: Borders Superstores, Waldenbooks Specialty Retail stores and International stores. In July 2010, the Company sold Paperchase Products Limited to Primary Capital Limited."
Amazon.com is world's biggest online retailer. As per Wikipedia "its product line includes Books, music CDs, videotapes and DVDs, software, consumer electronics, kitchen items, tools, lawn and garden items, toys & games, baby products, apparel, sporting goods, gourmet food, jewelry, watches, health and personal-care items, beauty products, musical instruments, clothing, industrial & scientific supplies, groceries, and more. Hence its value chain starts from inbound logistics where it sources all these products and it is not involved in own manufacturing. Its operations are ecommerce enabled and its website domain amazon.com attracted at least 615 million visitors annually by 2008 according to a Compete.com survey." (Wikipedia)
Its marketing and sales is through website and has tied up with various vendors. According to the Internet audience measurement website Compete.com, Amazon attracts approximately 50 million U.S. consumers to its website on a monthly basis. Its outbound logistics involves delivering the product to the consumer's place. They have to give home delivery.
The Clorox Company deals in personal care, cleaning and grocery products. As per money central.com, "The Company sells its products primarily through mass merchandisers, grocery stores and other retail outlets. It markets some brand names, including its namesake bleach and cleaning products, Green Works natural cleaning and laundry ...
Response discusses three companies, recommend a capital structure