This week the class read about capital structure. Capital planning is the procedure used to figure out if a company’s log-term investments merit seeking after. A major consideration in capital budgeting decision is the risk. The company needs to differentiate the assumed return from the venture with the uncertainty connected with it. The bigger the risk attempted, the increased return, the smaller the risk, and the smaller the return. At the point when the company, settles on capital budgeting choice, they wish at a minimum to recuperate enough to pay the expansion expanded by the venture. The article I came across with is a great example of capital structure, “How Will The Virgin America Deal Alter Alaska Air’s Capital Structure?”
• Alaska
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o Alaska Airline aims to lower ratio closer to $45 by 2020
It is clear what Alaska’s plan to grow and reinforce its competitiveness in the market. Even though it is risky there analysis shows that with the added the rise in leverage will balance debt keeping them. One of the upsides of ratio analysis is that it permits examination over organizations, a movement which is regularly called benchmarking. And the article states the ratio is lower in contrast to “legacy carriers”.
The only thing that comes to mind when thinking long-term investment would be acquiring a home or when I assisted other in the process. At the beginning, when I started real estate it was not too bad to get a loan and the opportunities were endless, but many got greedy and took advantage of so many individuals. Regardless, prior to acquiring a home the individual (s) need to be pre qualified according to their debt and income. The bank will determine how much the individual(s) is able to afford with there current obligations. After the bank determines their availability, they are able to commence the searching for a
Ratio analysis are useful tools when judging the performance of a company by weighing and evaluating the operating performance (Block-Hirt). There are 13 significant ratios that can separate by four main categories, profitability, asset utilization, liquidity and debt utilization ratios. The ratio analysis covered here consists of eight various ratios with at least one from each of these main categories. These ratios were used to compare and contrast the performance of Verizon versus AT& T over the years 2005 and 2006.
Finding the perfect capital structure in terms of risk and reward can ensure a company meets shareholder expectations and protects a firm in times of recession. Capital structure refers to how a business puts its money to “work”. The two forms of capital structure are equity capital and debt capital. Both have their benefits and limitations. Striking that perfect balance between the two can mean the difference between thriving versus trying to survive.
The capital structure decisions for Target Inc. are significant since the profitability of the firm is specifically influenced by this decision. Profit maximization is part of the wealth creation process and wealth maximization can be a lengthy process for financial managers. Profits affect the value of the firm and it is expressed in the value of stock. Cost of capital is how investors evaluate weighted average cost of capital (WACC). Capital structure ratios help investors gauge the level of risk that a company is taking on through financing. While Target
Alaska Air has the dominant market share serving Alaska. Unlike the rest of the US economy, Alaska has been seeing steadily incr...
Any successful business owner or investor is constantly evaluating the performance of the companies they are involved with, comparing historical figures with its industry competitors, and even with successful businesses from other industries. To complete a thorough examination of any company's effectiveness, however, more needs to be looked at than the easily attainable numbers like sales, profits, and total assets. Luckily, there are many well-tested ratios out there that make the task a bit less daunting. Financial ratio analysis helps identify and quantify a company's strengths and weaknesses, evaluate its financial position, and shows potential risks. As with any other form of analysis, financial ratios aren't definitive and their results shouldn't be viewed as the only possibilities. However, when used in conjuncture with various other business evaluation processes, financial ratios are invaluable. By examining Ford Motor Company's financial ratios, along with a few other company factors, this report will give a clear picture of how the company is doing now and should do in the future.
Article by Baker and Wurgler (2002) discusses equity “market timing”, i.e. practice of companies to issue shares when they are relatively expensive and repurchase them when they are cheap. According to MM model costs of different forms of capital do not vary independently because the markets are efficient and integrated, but in practice companies use equity market timing. Analysis shows that equity market timing is successful on average and companies tend to issue new shares when investors are too enthusiastic about future earnings also managers admit using market timing. Paper by Baker and Wurgler deals with the problem how market timing affects capital structure. Fluctuations in market value have very long-run impacts on capital structure. It is hard to explain this result within traditional theories of capital structure for example pecking order. Pecking order should prevent managers from issuing new equity entirely. Managerial entrenchment theory of capital structure by Zwiebel (1996) is partially consistent with market timing theory, but practice shows that managers are exploiting new investors instead of existing ones. Capital structure is the cumulative outcome of attempts to time the equity market.
“In spite of its limitations ratio analysis is widely used as a means of evaluating the past performance and predicting the future successes or failures of business organisations.”
In 2004 the airlines Air France and KLM merged into a new entity known as Air France-KLM. Both the CEO's of the companies saw the need to merge because of the need for consolidation in the European aviation industry. It was a unique merger in the way that is was a cross border merger between companies with different nationalities and cultures. Both companies agreed upon retaining their own brands and remained mostly autonomous. Both the CEO's, Leo van Wijk (KLM) and Jean-Cyril Spinetta (Air France), treated each other as equals. They tried to look like a team to the outside world, and succeeded in this aspect.
Ratios traditionally measure the most important factors such as liquidity, solvency and profitability, as well as other measures of solvency. Different studies have found various ratios to be the most efficient indicators of solvency. Studies of ratio analysis began in the 1930’s, with several studies of the concluding that firms with the potential to file bankruptcy all exhibited different ratios than those companies that were financially sound. Among the study’s findings were that the deciding factor of the predictor of bankruptcy should not be only a few ratios, as the measure of a company’s financial solvency may differ as the firm’s situations differ. The important question is to which ratios are to be used and of those ratios chosen, which ratios are given priority weight.
Titman, S. and Wessels, R. (1988). The Determinants of Capital Structure Choices. Journal of Finance , Vol. 43.
It is important to consider the established capital structure theories because they are the foundation for the development
Leverage ratio is a ratio that shows some part of the overall capital and funds spent by debt. Analysis tools used are Debt to Equity Ratio (DER) and Debt Ratio (DR). Debt to Equity Ratio is the comparison of amount of debt to total capital. This ratio shows the ability of a company to meet the overall debt by using their own capital. Meaning, if at any time the capital liquidated, the company has been able to meet both short-term liabilities and long-term liabilities (Muqorobin & Nasir, 2009). Second indicator in Leverage Ratio used in this study is Debt Ratio (DR). Debt Ratio is a comparison of total debt to total assets that aims to measure how much the entire debt is secured by the company.
In the field of finance capital structure means a way an organization or firms finances their assets by the way of some mix and match of Equity, Debt or Hybrid Securities.
The traditional approach stresses the benefits of using the combination of cheaper debt and equity finance to find the optimal capital structure, so the total value of firms will be increased with the sensible debt. (Watson and Head, 2013) Of cause, the model was created which based on a certain assumption 1) There is no tax at a personal or a corporate level. 2) The perpetual debt finance and ordinary equity shares are the financial choices for firms. 3) The capital structure can be changed without incurring issue or redemption costs. 4) Any debt finance is up or down, which will lead to the same situation in equity finance. 5) All distributable earnings will be regarded as dividends by companies. 6) The relative business risks of companies keep existing over time. 7) The earnings and dividends of a company will not be increased over time.
Firms can either use debt financing and/or equity financing sourced from capital markets as the sources of capital and their proportions of use may be different. The equity providers require a return on their investment while the creditors also require a minimum return from their borrowings. Pratt (5) points out that the cost of capital is dependent upon the use of the funds and not from their source. Pratt (6) also emphasizes that cost of capital is a representation of the expectations of investors. Therefore, the basis for calculation is market expectations, and use of the market value rather than book value. When determining the cost of capital, a firm will decide the minimum return required by the equ...