4.1 DESCRIPTIVE STATISTICS Mean leverage measured by debt to capital ratio was 0.45, while the median was 0.39. The highest leverage was 7.37. Mean leverage was highest in 2012. The mean leverage for cement industry was 0.46 while median was 0.47. Highest leverage was 3.5. The mean leverage for personal products was 0.39, while median leverage was 0.09. Highest leverage was 7.37. Leverage measured by debt to capital declined throughout the period of study. Table 1: descriptive statistics of leverage (debt to capital) Measure Total Cement Personal products Mean 0.45 0.46 0.39 Median 0.39 0.47 0.09 Minimum -2.59 -2.59 0 Maximum 7.37 3.50 7.37 Count 368 272 96 Figure 2: Yearly mean of debt to capital ratio Mean leverage as measured by non equity liabilities to total debt was 0.64 while median was 0.57. Highest leverage was 5.8. Mean leverage was highest at 0.748 in 2005 and lowest in 2008 at 0.508. Mean leverage for cement industry and personal products was 0.64 and 0.63 respectively. The median leverage was 0.59 and 0.44 for cement and personal products industry respectively. Table 2: Descriptive statistics of leverage (non equity liabilities to total assets) Total Cement Personal products Mean 0.64 0.64 0.63 Median 0.57 0.59 0.44 Minimum 0 0 0.16 Maximum 5.78 3.35 5.8 Count 368 272 96 Figure 3: Yearly mean of total non equity liabilities to total assets ratio Mean leverage as measured by debt to total asset was 0.34 while median was 0.28. Mean leverage for cement and personal product industry was 0.38 and 0.28 respectively. The median for cement industry was 0.37 and for personal products was 0.06. Table 3: Descriptive statistics of leverage (debt to total assets) Total Cement Personal products Mean 0.357 0.357 0.278 Me... ... middle of paper ... ... correlation with leverage, only profitability and liquidity had significant relationship. The regression equation had R² of 0.18. The regression analysis shows that profitability and size are major determinants of leverage. The table gives the relationship between leverage and independent variables. Table 9: Regression Analysis (Debt Net Assets) Regression Statistics Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Intercept 0.7211 0.1746 4.1292 0.0001 0.3777 1.0645 Fixed assets/total assets 0.8564 0.1853 4.6212 0.0000 0.4920 1.2209 OI/TA -0.8682 0.2195 -3.9553 0.0001 -1.2999 -0.4366 Ln(TA) -0.0367 0.0252 -1.4538 0.1469 -0.0863 0.0129 Dep/EBIT -0.0476 0.0668 -0.7127 0.4765 -0.1789 0.0837 Variability -0.0001 0.0002 -0.8601 0.3903 -0.0004 0.0002 Growth -0.0032 0.0034 -0.9239 0.3562 -0.0099 0.0036 Liquidity -0.0822 0.0297 -2.7658 0.0060 -0.1407 -0.0238
These ratios can be used to determine the most desirable company to grant a loan to between Wendy’s and Bob Evans. Wendy’s has a debt to assets ratio of 34.93% while Bob Evans is 43.68%. When it comes to debt to asset ratios, the company with the lower percentage has the lowest risk. Therefore, Wendy’s is more desirable than Bob Evans. In the area of debt to equity ratios, Wendy’s comes in at 84.31% while Bob Evans comes in at 118.71%. Like debt to assets, a low debt to equity ratio indicates less risk in a company. Again, Wendy’s is the less risky company. Finally, Wendy’s has a times interest earned ratio of 4.86 while Bob Evans owns a 3.78. Unlike the previous two ratios, times interest earned ratio is measured on a scale of 1 to 5. The closer the ratio is to 5, the less risky a company is. From the view of a banker, any ratio over 2.5 is an acceptable risk. Both companies are an acceptable risk, however, Wendy’s is once again more desirable. Based on these findings, Wendy’s is the better choice for banks to loan money to because of the lower level of
Balance sheet lists assets, liabilities and owner’s equity. The assets listed on the balance sheet are acquired either by debt (liabilities) or equity. “Companies that use more debt than equity to finance assets have a high leverage ratio and an aggressive capital structure. A company that pays for assets with more equity than debt has a low leverage ratio and a conservative capital structure. That said, a high leverage ratio and/or an aggressive capital structure can also lead
Target Corporation: Report on Long-term Financing Policy and Capital Structure with an Acquisition Analysis Introduction This report will be based on the Target Corporation, and will consist of two sections: 1) long-term financing policy and capital structure, and 2) an acquisition analysis. The first section will include: Target's most recent long-term financing decision; an analysis of the economic, business, and competitive background in which the financing occurred; Target's book value and market value; possible changes that would occur to Target's finance policy and capital structure if it was forced to consider re-organization and bankruptcy strategies; and finally discuss Target's international investment and financing opportunities, as well as foreign exchange risks. The second section will be a report to the board of directors that identifies a synergistic acquisition candidate for Target.
MCI current capital structure is x% debt and y% equity. Their key ratios are a, b, and c. Comparing to other firms in the utilities industry they appear to be underutilizing (debt/equity). (See exhibit D). Referencing the forecast there is expected to b...
In assessing Du Pont’s capital structure after the Conoco merger that significantly increased the company’s debt to equity ratio, an analyst must look at all benefits and drawbacks of a high debt ratio. The main reason why Du Pont ended up with a high debt to equity ratio after acquiring Conoco was due to the timing and price at which they bought Conoco. Du Pont ended up buying the firm at its peak, just before coal and oil prices started to fall and at a time when economic recession hurt the chemical industry of Du Pont. The additional response from analysts and Du Pont stockholders also forced Du Pont to think twice about their new expansion. The thought of bringing the debt ratio back to 25% was brought on by the fact that the company saw that high levels of capital spending were vital to the success of the firm and that high debt levels may put them at higher risk for defaulting.
There is no universal theory of the debt-equity choice, and no reason to expect one. In this essay I will critically assess the Pecking Order Theory of capital structure with reference and comparison of publicly listed companies. The pecking order theory says that the firm will borrow, rather than issuing equity, when internal cash flow is not sufficient to fund capital expenditures. This theory explains why firms prefer internal rather than external financing which is due to adverse selection, asymmetry of information, and agency costs (Frank & Goyal, 2003). The trade-off theory comes from the pecking order theory it is an unintentional outcome of companies following the pecking-order theory. This explains that firms strive to achieve an optimal capital structure by using a mixture debt and equity known to act as an advantage leverage. Modigliani and Miller (1958) showed that the decisions firms make when choosing between debt and equity financing has no material effects on the value of the firm or on the cost or availability of capital. They assumed perfect and frictionless capital markets, in which financial innovation would quickly extinguish any deviation from their predicted equilibrium.
When discussing the cost of equity capital, or the rate of return required by investors for their share expenses, there are three main models widely used for analyzation. These models are the dividend growth model, which operates on the variable of growth and future trends, the capital asset pricing model (CAPM), which operates on the premise that higher returns are a result of higher risk, and the arbitrage pricing theory (APT), which has a more flexible set of criteria than CAPM and takes advantage of mispriced securities
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 Quick Ratio shows that the company’s cash and cash equivalents are the highest t...
The article Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy was written in 1968 by Edward I. Altman. The purpose of the article is to address the quality of ratio analysis as an analytical technique. At the time some academicians were moving away from ratio analysis and moving toward statistical analysis. The article attempted to determine if ratio analysis should be continued, eliminated and replaced by statistical analysis or serve together with statistical analysis as cofactors in financial analysis. The example case used by the article was the prediction of corporate bankruptcy.
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
The capital structure of a firm is the way in which it decides to finance its operations from various funds, comprising debt, such as bonds and outstanding loans, and equity, including stock and retained earnings. In the long term, firms seek to find the optimal debt-equity ratio. This essay will explore the advantages and disadvantages of different capital structure mixes, and consider whether this has any relevance to firm value in theory and in reality.
This is a trend table of industrial average financial ratio for the previous five years in comparison:
During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program that had been proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Harry Davis’s cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task.