Competition Bikes

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Financial Analysis JET2 Task 3 A1. Capital Structure Recommendation A sound capital structure needs to be in place for Competition Bikes to maximize its shareholder return and expand. A good capital structure would ensure adequate funding and future business stability. However, adequate funding involves capital financing which also has its own risks. If bonds are issued, the company would have to pay interest on them but if sales projections aren’t met, this could have a huge negative impact on shareholder earnings. Also dividends could be impacted if no shares issued to cover growth or expansion costs because profits will have to be spread among larger number of shares. To provide a base for analysis in comparing all structures,…show more content…
The total earnings per common stock is $.16 for years 9-13. 2. Discuss capital budget areas that raise concern. 9% Bonds – Income before taxes was hugely lowered because of the significant amount of interest paid to the bonds. This caused the total income paid for common stock after paying the income taxes to be the lowest in all structures. Also, these bonds means more debt was added to the company. The more bonds the greater the amount of debts. For a firm with such amount of debts, will likely find itself struggling to manage cash flow because of the many payments with interests no matter how much the income will be. As a result, this option provided the lowest earnings per common share in years 9-13 of $.103. 50% Preferred stock (5%, $50 par), 50% Common stock – This option provided for zero interest payment on bonds. The company will be able to keep all earnings before interest in taxes because interest on bonds will be paid. The company will have the most net-income out of all structures which resulted to $.203 for years 9-13 of earnings per common share. It is the recommended option to consider. 20% 9% Bonds, 80% Common Stock – This option is a mixture of bonds and common stock which provides a much better form of financing the business than having only bonds. The main reason is because it reduces interest rates to be paid on bonds while increasing income before taxes. With this option, the
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