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.
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 (Do not quote the actual company's capital structure or their debt-to-equity ratios as per their balance sheet.)
Explain 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.
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The first company we consider is that of Borders Group Incorporated. This group has got a beta of 3.80. The Borders Group Incorporated is a bookstore chain in the USA, second after Barnes and Noble and sells a wide range of books, CDs, DVDs and magazine. There are more than 500 Borders stores in the US. The stores of Borders Group Incorporated include Waldenbooks Specialty Retail segment, Borders express, Borders airport stores, and Borders Outlet. The company also operates calendar stores and kiosks called Day by Day.
Currently, the business of Borders Group Incorporated is such that the business is highly risky. The reason for this is that brick and mortar retail stores are facing a declining footfall. Even in Borders Group Incorporated, the employees say that there are reductions in payroll hours. The book retailing sector is one that has been worst hit during the current economic recession. If we focus on the Borders Group Incorporated itself we find that the CEO Ron Marshall resigned in January 2010. In other words there is high riskiness of the company.
Under the circumstances mentioned, debt financing is very risky for Borders Group Incorporated. Consider this, on March 31, Borders Group Incorporated gave an official ...
This solution gives you a detailed discussion on cost of capital