Rjet Task 3

In: Business and Management

Submitted By kyunck
Words 2132
Pages 9
Financial Analysis- JET 2 Task 3

Krista Yunck, MBA MGMT & STRAT 11/01/2012

Student ID: 000285809

My Mentor: Rose Sklar

925-759-2061 or kyunck@wgu.edu

Tucson, AZ- Arizona

A1. Capital Structure

Capital structure is defined as the mix of a company’s short-term debt, and long-term debt as well as their common and preferred equities. For Competition Bikes Inc. capital structure is how they finance their overall operations as well as how they finance their overall growth. Competition Bikes has debt from long-term notes payable and working capital. While there equity lays within their common and preferred stock as well as their retained earnings.

Capital structure needs to be implemented into Competition Bikes Inc., since they want to expand their business into Canada. By integrating a capital structure approach they will be able to ensure adequate funding and afford future stability of the company. The company has come up with five approaches in order to generate the capital required for this expansion. The first approach is to issue 9% bonds for 100% of the financing needs. The second approach is to issue common stock for 50% and preferred stock for 50%. The third approach is to issue 5 year 9% bonds for 20% and common stock for 80%. The fourth approach is to issue 5 year 9% bonds for 40% and common stock for 60%, and the fifth and final approach is to 5 year 9% bonds for 60% and common stock for 40%. After reviewing all five possible capital structure approaches, I recommend Competition Bikes Inc. consider approach two. By issuing common stock for 50% and preferred stock for 50% (with 5% dividend interest), shareholder return will be maximized. This approach will yield the highest earnings per share (EPS) (Investopedia, 2011), and yield above the expected earnings before interest and taxes amounts (EBIT).

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