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Total Capital Structure, Debt, and Equity

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Your next meeting is with the head of treasury to discuss the international impact to the firm's capital structure. Toto Matsui, the head of treasury, wants you to analyze what would be the implications to the firm's capital structure if the company took on debt denominated in some currency other than U.S. dollars. In particular, he wants you to analyze the following:

What risks will the company incur if it increases its long-term debt from US$100 million to US$150 million by taking on 40 million in euro debt based on current exchange rates of 0.80 euros to US$1? (The euro debt will pay a 7% coupon.)
How would changes in exchange rates between the euro and U.S. dollar impact the firm's capital structure and interest payments on the euros?

Mr. Matsui tells you to assume the company's equity will remain at US$150 million and will not change when the euro debt is issued. He wants you chart (graph) how exchange rates will impact the capital structure of the firm and interest payments on the euro-denominated debt. In addition, he wants you to explain the graphs in a bulleted PowerPoint presentation.

Use Microsoft Excel to graph the capital structure of the firm in U.S. dollars based on changes in exchange rates. Use two scenarios: U.S. dollar appreciation against the euro and U.S. dollar depreciation against the euro. For capital structure, graph to total capital structure, debt, and equity.

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https://brainmass.com/business/foreign-exchange-rates/total-capital-structure-debt-and-equity-119827

Solution Summary

This solution provides a detailed response and the step by step methodology required for the calculations and graphs which accompany this solution. The calculations and graphs are provided in an attached Excel document. An explanation which interprets the calculations and graphs has been constructed in a PowerPoint presentation which accompanies this solution.

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Target capital structure: prepare and analyze debt ratios

THE COMPANY USED IS TARGET

Balance Sheet and Market Value of Your Company's Liabilities and Equity

Refer to your company's 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 our 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 our 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 paper with the following:

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 recommendation as to whether or not you consider these ratios to be too small or too large. Should your SLP company 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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