Preview

Managing Capital And Financial Assets

Powerful Essays
Open Document
Open Document
1298 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Managing Capital And Financial Assets
Managing Capital and Financial Assets As Competition Bikes considers expansion into Canada, it must decide if the initial investment is worth the potential return. This report will recommend the capital structure that will maximize shareholder return, analyze the capital budget and areas of concern, recommend how to obtain and manage working capital for the expansion, and evaluate the options of merging with vs. acquiring Canadian Biking.

A1. Capital Structure
Capital structure refers to how a company finances its operations. In general, this financing comes from two sources: debt and equity. In this case, Competition Bikes needs to finance its expansion and is considering five capital structure alternatives, which include various combinations of bonds and stock. To determine which capital structure provides the greatest return for shareholders, the metric used for comparing the different capital structures will be earnings per share (EPS). The following table shows the projected earnings per common stock share for each year, and for each alternative capital structure, based on a moderate forecast for Canadian Biking’s earnings before interest and taxes (EBIT). The highest earnings per share for each year are highlighted in yellow.

Capital Structure Alternatives :
12% bonds 50% preferred stock 50% common stock 20% - 12% bonds 80% common stock 40% - 12% bonds 60% common stock 60% - 12% bonds 40% common stock
Year 9 0.002 0.027 0.027 0.023 0.017 Year 10 0.009 0.032 0.032 0.028 0.023 Year 11 0.019 0.039 0.038 0.035 0.031 Year 12 0.031 0.048 0.046 0.043 0.040 Year 13 0.042 0.057 0.054 0.052 0.049 Earnings per share

JET2 TASK 3 3

The recommendation is to use the capital structure of 50% preferred and 50% common stock. Because there is no interest to be paid, all of the money raised can be kept within the company. Looking at the table above, it is easy to see that this structure will consistently provide Competition Bikes with greater earnings per

You May Also Find These Documents Helpful

  • Better Essays

    JET2 Task 3

    • 2414 Words
    • 8 Pages

    Capital structure is how a company finances its overall operations and growth by using funds from equity or debt (Investopedia, 2012). Of course, every company must determine its preference on its debt-to-equity ratio and determine which capital structure works best for them.…

    • 2414 Words
    • 8 Pages
    Better Essays
  • Satisfactory Essays

    HW1 solutions

    • 504 Words
    • 3 Pages

    2. Capital structure refers to the mix of a firm’s long-term debt financing and equity financing. Suppose that a firm has $4 billion debt. The market values the firm’s 100 million (equity) shares at $60 per share. Earnings per share is $5. Dividend per share is $1.What is the fraction of equity in the firm’s capital structure?…

    • 504 Words
    • 3 Pages
    Satisfactory Essays
  • Good Essays

    Task 2 Budget Planning

    • 1895 Words
    • 8 Pages

    There are a few areas of concern when looking over Competition Bike’s budget for the upcoming year (Year 9). This budget estimates that 3,510 units will be sold. CB has just experienced a 15 % decline in sales, due to the economic situation. In year 8, CB sold 3,400 units. This flexible budget is allowing 110 more units be added into the mix. Although sales trends have remained consistent, despite the decline in sales from professional riders, it might be wise to not aim as high to make sure the recovery actually does occur. The sales forecast predicts that CB will recover over the next 3 years. CB estimates over $100,000 more in cash and cash equivalents for year 9. This is, of course due to the increase in unit sales that is worked into the budget. It might be a better idea to underestimate rather than overestimate when it comes to cash on hand.…

    • 1895 Words
    • 8 Pages
    Good Essays
  • Best Essays

    Team D1 Case 3

    • 3739 Words
    • 32 Pages

    The Board must seek a strategy that maximizes capital structure value. Any firm’s capital structure is a mix of debt and equity that maximizes the stock price (Brigham & Ehrhardt, 2014). Entities finance their operations through debt or its own capital. Debt can exist in many forms such as bond issues or long-term notes payable (loans, credit lines, etc.). Capital (or equity) can be stock or retained earnings. The reasons for using various financing options from each category are numerous. One of the leading factors is risk. Nobody wants risk, but without it there can be no reward. Also, it is important to weigh the value of maintaining the firm’s capital (earned interest) versus the cost of debt (interest paid) and figure in the…

    • 3739 Words
    • 32 Pages
    Best Essays
  • Good Essays

    Hsbr Ibm Case

    • 1876 Words
    • 8 Pages

    Earnings Per Share (from continuing operations) Analyst Expected Earnings Per Share Difference % Surprise Jun-00 1.06 1.00 0.06 6.00% Mar-00 0.83 0.77 0.06 7.79% Dec-99 1.12 1.06 0.06 5.66% Sep-99 0.90 0.90 0.00% Jun-99 0.91 0.88 0.03 3.41%…

    • 1876 Words
    • 8 Pages
    Good Essays
  • Satisfactory Essays

    (TCO 1) When analyzing alternative capital structures for a firm, a financial manager must consider which of the following?…

    • 3077 Words
    • 13 Pages
    Satisfactory Essays
  • Good Essays

    Pm 598 Case Study

    • 848 Words
    • 4 Pages

    To be fair to our partners we will use the same capital distribution that was used at the beginning of the investment, Chris and Pat Smith, put $25,000 and the chefs put $10,000 up to total $35,000 for 100% of the shares. Each share is worth $350, therefore we own 55.5% of the company while the chefs own $45.5%.…

    • 848 Words
    • 4 Pages
    Good Essays
  • Good Essays

    JET2 TASK 3

    • 1943 Words
    • 6 Pages

    A2. Competition Bikes needs to analyze their capital budgeting. Businesses should acquire investments that are going to bring in more revenue but they have to make sure for the long term the investment…

    • 1943 Words
    • 6 Pages
    Good Essays
  • Powerful Essays

    Ducati Solution

    • 2852 Words
    • 12 Pages

    Issues/Challenges Today, Ducati is one of the most successful motorcycle companies in the world with a dramatic profit growth since 1996. Before its huge success, Ducati was one step away from facing bankruptcy. Ducati managed to overcome such an obstacle through strong innovation and culture. Today, Ducati is faced with another challenge that may bring fortune to the company if successfully managed. Ducati set a new goal, which is to sustain the explosive double-digit profit growth in the next decade and eventually reach Harley Davison’s profit level. Ducati is considering attacking Harley Davidson by entering the cruiser market, which is Harley Davidson’s niche product and also a very profitable market segment in the industry. To do this, Ducati must invest 17 million Euro and cost of 26 million Euro. Based on this huge capital requirement, should Ducati enter the new market segment or should Ducati just concentrate on its current segment? If Ducati chooses to enter the cruiser market, what are other requirements besides the capital? Does Ducati have what it takes to succeed in the new market segment? The purpose of this memo is to help the executives of Ducati to make the optimum decision for Ducati’s future success. This memo contains the industry analysis, as well as an internal strategic analysis, company performance, and solutions and recommendations. This industry is divided into 4 segments. Ducati’s dominating segment is the sport sector. Ducati managed to utilize its differentiation strategy by taking into account of the industry’s driving forces. The cruiser segment is one sector that Ducati is very interested in entering. Unfortunately, Bert’s consulting concluded that this is not the best option through the feasibility analysis. The analysis contains the advantages and disadvantages of both options and the result was that the disadvantages outweighed the advantages. Also, entering the cruiser market is not really necessary for Ducati based on its…

    • 2852 Words
    • 12 Pages
    Powerful Essays
  • Powerful Essays

    Competition Bikes

    • 3711 Words
    • 14 Pages

    A sound capital structure needs to be in place for Competition Bikes to maximize its shareholder return and expand. A good capital structure would ensure adequate funding and future business stability. However, adequate funding involves capital financing which also has its own risks. If bonds are issued, the company would have to pay interest on them but if sales projections aren’t met, this could have a huge negative impact on shareholder earnings. Also dividends could be impacted if no shares issued to cover growth or expansion costs because profits will have to be spread among larger number of shares.…

    • 3711 Words
    • 14 Pages
    Powerful Essays
  • Good Essays

    the cost of common stock

    • 1017 Words
    • 5 Pages

    As the chief financial officer of a young company with lots of investment opportunities, Eco’s CFO closely monitor the firm’s cost of capital. The CFO keeps tabs on each of the individual costs of Eco’s three main financing sources: long-term debt, preferred stock, and common stock. The target capital structure for Eco is given by the weights in the following table:…

    • 1017 Words
    • 5 Pages
    Good Essays
  • Satisfactory Essays

    Plan 1. An all-common equity structure in which $2.4 million will be raised selling $90,000 shares of common stock.…

    • 312 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    Ducati Solution

    • 301 Words
    • 2 Pages

    Today, Ducati is one of the most successful motorcycle companies in the world with adramatic profit growth since 1996. Before its huge success, Ducati was one step away fromfacing bankruptcy. Ducati managed to overcome such an obstacle through strong innovation andculture. Today, Ducati is faced with another challenge that may bring fortune to the company if successfully managed. Ducati set a new goal, which is to sustain the explosive double-digit profitgrowth in the next decade and eventually reach Harley Davison’s profit level. Ducati isconsidering attacking Harley Davidson by entering the cruiser market, which is HarleyDavidson’s niche product and also a very profitable market segment in the industry. To do this,Ducati must invest 17 million Euro and cost of 26 million Euro. Based on this huge capitalrequirement, should Ducati enter the new market segment or should Ducati just concentrate onits current segment? If Ducati chooses to enter the cruiser market, what are other requirements besides the capital? Does Ducati have what it takes to succeed in the new market segment?The purpose of this memo is to help the executives of Ducati to make the optimumdecision for Ducati’s future success. This memo contains the industry analysis, as well as aninternal strategic analysis, company performance, and solutions and recommendations. Thisindustry is divided into 4 segments. Ducati’s dominating segment is the sport sector. Ducatimanaged to utilize its differentiation strategy by taking into account of the industry’s drivingforces. The cruiser segment is one sector that Ducati is very interested in entering. Unfortunately,Bert’s consulting concluded that this is not the best option through the feasibility analysis. Theanalysis contains the advantages and disadvantages of both options and the result was that thedisadvantages outweighed the advantages. Also, entering the cruiser market is not reallynecessary for Ducati based on its current performance…

    • 301 Words
    • 2 Pages
    Good Essays
  • Powerful Essays

    CHAPTER 4: ACCOUNTING FOR GOVERNMENTAL OPERATING ACTIVITIES ( ILLUSTRATIVE TRANSACTIONS AND FINANCIAL STATEMENTS Solutions to Exercises and Problems 4-2. 1. a. 6. a. 2. c. 7.…

    • 853 Words
    • 4 Pages
    Powerful Essays
  • Better Essays

    Economics Jargons

    • 3151 Words
    • 13 Pages

    This refers to the way a company finances its assets and operations through a combination of equity (stock), debt (loans), or hybrid securities. A company's capital structure is then the composition or 'structure' of its risks and liabilities. The company’s ratio of debt to total financing is referred to as its leverage.…

    • 3151 Words
    • 13 Pages
    Better Essays