Advanced Managerial Finance

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Question: 1. Locate the annual balance sheets for General Motors (GM), Merk (MRK), and Kellogg (K). For each company calculate the long term debt-equity ratio for the prior two years. Why would these companies use such different capitals structures? 2. Look up a company and download the annual income statements. For the most recent year, calculate the average tax rate and EBIT, and find the total interest expense. From the annual balance sheets calculate the total long-term debts (including the portion due within one year). Using the interest expense and total long term debts, calculate the average cost of debt. Next, find the estimated beta for the company on the S&P Stock Report. Use this reported beta, a current T-bill rate,…show more content…
b) Size of the company The size of the company will affect the capital structure of company. This is because large companies are generally lower business risk compare to small companies. Thus, large companies can raise the debt capital easily. In this case, the Kellogg is expanding their business and size of company is getting bigger, so they tend to use more debt than other companies. c) Business risk If the company is more risky in the industry, the debt-equity ratio will generally low because the company is difficult to raise debt capital due to the high risk. In this case, General Motor and Merck have low debt-equity ratio due to the high business risk such as technology, customer demands, and competitors and so on. d) Tax Exposure Tax rate of the company will influence in making capital structure decisions. The debt payments to the debtors are tax deductible. This would be the advantage for the company which has high tax rate. So, if the company has the high tax rate, they will tend to use debt capital structure to decrease their tax amount. e) Flexibility Flexibility means the ability of company to raise its capital structure to the needs of the different conditions nowadays. Company will more flexible when they have low debt-equity ratio. Due to the initial debt of the company is low, so the company most probably has the ability in paying back the debts. Thus, they will raise funds easily. In this case, General Motor and
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