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Mattel, Clorox, MGM Resorts

Consider three companies: Mattel, Clorox, and MGM Resorts International. 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 (Do not quote the actual company's capital structure or their debt-to-equity ratios as per their balance sheet.)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.

Solution Preview

Mattel, Inc.
(Public, NASDAQ:MAT)
Source: http://moneycentral.msn.com/investor/invsub/results/compare.asp?Page=InvestmentReturns&symbol=MAT

Beta of this company is 0.99
? Why using beta? Beta is a measure of systematic risk or market risk. Based on the beta of this particular stock which is almost 1, we can conclude that this stock moves with the market.
? Debt/Equity Ratio = 0.48, the industry ratio = 0.66
? Compared to its industry, Mattel's has below average Debt/Equity Ratio. Low debt ratio is a good thing in the recession time, but it could mean that the company is not thinking of expanding.
? In 2010 their ROE (return on equity) was 26.55%, which is a good return compared to its risk. Low risk + high return = Good investment.
? Second, we have to compare this company's return to their Industry's returns or competitors' returns. The Leverage ratio ...