BBBY will need to trade off business risk against financial risk. They operate in an industry with fairly low business risk however BBBY's operating leverage is high which could indicate a higher than industry business risk if they are not cognizant of managing their fixed costs. In addition, BBBY's debt to total asset ratio is higher than their industry. Both of these indicate a high business and financial risk. If BBBY were to recapitalize to 80% debt to total capital it would only increase their financial risk and reduce shareholders earnings per share. Therefore the recommendation for a capital structure for BBBY would be to add more than the 40% debt to total capital but not more than 80%.
Having a conservative debt policy increased the credit worthiness of the firm. Because the firm believes that the interest coverage ratio is a critical factor for credit rating agencies, they attempted to keep this ratio very high. Also, by having a higher credit rating they are able to access short term commercial paper borrowings at better rates. This type of short term borrowing makes up 47% of Diageo’s portfolio. By not having a strong credit rating they would not be able to lock in the low rates which would impact their business significantly.
Diageo, one of the world’s leading consumer goods companies, was formed from the merger of GrandMet and Guinness. In 2000, the company announced its intention to sell its packaged food subsidiary, Pillsbury, and 20% of its Burger King subsidiary. Because of the restructuring opportunity, the company wanted to rethink its financing mix.
The long-term liquidity risk ratio such as LT debt/Equity, D/E, and Total Liabilities to Total Assets all show a decline from year 2005 due to the repayment of debts. The interest coverage ratio also shows a healthy number of 29.45 in comparison to the industrial average of 15.04 indicating a high ability to pay out its interest expense. Such a low relative risk is not surprising due to the nature of its business depending heavily in R&D development and large intangible assets.
Debt ratio percentages increased for Company G from 28.34% to 29.94%. Industry quartile is 30, 45 and 66 percent, putting Company G below average. Debt Ratio represents strength for Company G.
The course project involved developing a great depth of knowledge in analyzing capital structure, theories behind it, and its risks and issues. Before I began this assignment, I knew nothing but a few things about capital structure from previous unit weeks; however, it was not until this course’s final project that came along with opening
On a general level product margins look to be fairly strong, however when we take a closer look at the ABC costing method used for the beer label Bismark
An analysis of a repurchase of stock for $400 million cash, and recapitalization to 80% debt-to-total capital by borrowing $1.27 million reveals that BBBYs return on equity will be 113%, return on assets 61% and an after tax cost of debt of 28%. ROE is > ROA and ROA > after tax cost of debt. With the 80% debt-to-total capital structure ROE exceeds the other two capital structure scenarios of no debt and 40% debt-to-total capital. While all of this looks great there are other considerations. The household and personal products industries debt to total asset ratio is 34.69% while BBBY debt to total asset ratio is at 44% ($1,270,000/$2,865,023). Increasing to this capital structure would also reduce shareholders earnings per share.
DB could lower their short-term borrowing by lowering their dividend. This will not make the board of directors happy, since it has been mentioned that for some of their family members, this is their source of income. But lowering the dividend can be offset against
Diageo was formed in 1997 through the merger of two consumer product companies Grand Metropolitan plc and Guinness plc under the strategy of reducing costs through marketing synergies, cutting overhead expenses and increasing production and purchasing efficiencies. The new merger wanted to concentrate solely on the beverage alcohol business, so it sold its packaged foods (Pillsbury) and fast food (Burger King) businesses. While the mandate for Managing for Value came from the highest levels of Diageo, the treasury team was given the task of establishing the cost of capital for each of the different areas the company operated. The team had to create a simulation model which should consider new finance
1. What do you think about the capital structure policies Diageo has pursued in the past. Do they make sense? How does it compare to Diageo’s competitors’ policies? Which competitors would make for the best comparison? 2. Why is Diageo selling Pillsbury and spinning off Burger King? How might value be created through these transactions? 3. Based on the results of the simulation model, what recommendations would you make for Diageo’s capital structure? Does the model capture all of the important risk factors faced by Diageo? Would you want to adjust the model I any way?
We … believe Deluxe is underleveraged. We believe our steady cash flows put us in a position to increase our debt level up to $700 million and still maintain a strong investment-grade rating. The use of debt will lower our overall cost of capital and as a result increase returns on capital invested. We expect that the debt will be a combination of both long- and short-term borrowings.
In terms of financial flexibility, a relatively high interest coverage ratio (ICR) of 36.8 supports the company’s ability to Flexibility take on more debt. Especially by comparing the ratio with its peers, such ratio seems to match with its risk aversion philosophy. Agency Cost of Debt
The selling of Pillsbury would ensure Diageo 33% ownership of the General Mills/Pillsbury business without active managerial involvement and the Burger King spin off allowed floating of shares without tax penalties. In general, divesting of Diageo’s non-core business allowed for infusion of capital that allowed new internal investments and external acquisitions in businesses that can be more easily integrated to Diageo’s core competencies and can generate growth in stable, top-line revenues that are more reflective of the industry cost of capital.
* DOM improves the key matric of the total profit it earns per pound of its total sales. They earned 19.3 pence per pound spent by customers in FY2009 but in FY2010 they