During the course of operations of any company‚ once the capital budgeting decisions have been made and proposals selected‚ the most important question before the finance manager is to arrange sufficient funds to finance them. Funds are also required to keep existing projects going on and the company can raise funds required for investment either by increasing the owners’ claims or the creditors’ claims or both. The claims of the owners increases when the company raises the funds by issuing equity
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Capital Structure Policy In the normal course of business‚ Columbia Sportswear’s financial position and results operations are subject to a variety of market risks. Those market risks include interest movements on borrowing and investment activities. As well as the volatility of currency exchange rate movement. The business is also affected by the general seasonal trends due to the nature of outdoor industry. In 2011‚ approximately 65% of the net sale and all of their profitability were realized
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OPTIMAL CAPITAL STRUCTURE The optimal capital structure for a company should be the mix of equity‚ debt and hybrid instruments that minimizes the overall cost of funding‚ i.e. it should minimize the company’s weighted average cost of capital. In practice‚ however‚ it is not possible to specify this optimal capital structure exactly‚ for any individual company. It clearly makes sense to obtain funds at the lowest possible cost. In the long run‚ debt is cheaper than equity. However‚ when a company’s
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1. What message is MCI trying to send to financial markets? From 1993 until the start of 1995‚ MCI’s stock had outperformed the S&P. However‚ in 1995‚ the stock’s performance was poorer than the S&P. With shareholder’s getting restless‚ the idea of a stock repurchase was being considered. Depending on which option MCI chooses—stock repurchase with debt issuance or open market repurchase program—the message being sent could be different. Let’s consider option one—MCI issues debt and uses the
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Harvard Business School 9-298-101 Rev. March 18‚ 1998 Marriott Corporation: The Cost of Capital In April 1988‚ Dan Cohrs‚ vice president of project finance at the Marriott Corporation‚ was preparing his annual recommendations for the hurdle rates at each of the firm ’s three divisions. Investment projects at Marriott were selected by discounting the appropriate cash flows by the appropriate hurdle rate for each division. In 1987‚ Marriott ’s sales grew by 24% and its return on equity stood
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Chapter 12 Capital Structure and Leverage LEARNING OBJECTIVES After reading this chapter‚ students should be able to: • Explain why capital structure policy involves a trade-off between risk and return‚ and list the four primary factors that influence capital structure decisions. • Distinguish between a firm’s business risk and its financial risk. • Explain how operating leverage contributes to a firm’s business risk and conduct a breakeven analysis‚ complete with
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MCI Takeover Battle: Case analysis questions 1. What are the strengths and weaknesses of Verizon‚ MCI‚ and Qwest? Where are the synergies in the proposed combination? 2. Evaluate the two offers in Exhibit 7. What explains the two structures? In each case‚ what is the value to MCI shareholders? 3. Merger arbitrage (or risk arbitrage) funds speculate on the completion of stock and cash mergers‚ typically buying the target and hedging the risk of the acquirer’s shares accordingly to exchange ratio
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Homework #5 1) MCI initially financed its needs through equity issuance. This was done because MCI’s source of revenue was insecure in its infancy‚ and this allowed them to raise capital without being tied down by excessive debt repayments further down the road. To continue raising capital after MCI began posting early profits (particularly to repay short-term bank debt)‚ the company issued convertible preferred stock. This preferred stock was able to attract capital due to its dividend paying
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------------------------------------------------- We have reviewed the financial information provided for Adelphia Communications Corporation for the years 1992-1996. We have also evaluated the Company’s position and strategy within the industry‚ standard industry practices‚ and evaluated the Company’s ability to repay debt. We have concluded that the Company should be considered high-risk; however the decision of whether to grant loans to the Company should be based on the creditor’s acceptable
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Question 5: Evaluate the Put-Warrant/Convertible Bond proposal. Does it solve Intel’s capital structure dilemma? What arguments might be made in favor of it? Intel’s capital structure dilemma was that it was holding too much cash on hand. Eventually‚ there were three available strategies or alternatives that Intel could undertake in terms of cash disbursement policies. First‚ it could continue or expand its market-repurchase program. Secondly‚ Intel could declare dividends to its shareholders
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