Diageo Plc

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.

3) The interest resulting from the debt also will cost to the company even it is taxable. The interest is fixed base on the level of the debt even the company does not generate profit. This would need to be careful when take on the debt comparing to use its own capital. And the creditor may come to intervene on the business when the company has difficulty to service its debt.

Be Our Guest’s balance sheet shows good signs of liquidity. Current Ratios for the past four years have remained above 1 proving that the company can handle its current liabilities. The current ratios are not extremely high (19941.27, 1995- 2.17, 1996- 1.15 and 1997- 1.16), but they can cover the current liabilities. It is important to note that the company is operating on a thin line because the current assets are barely covering the current liabilities. This is particularly unpleasant because we are dealing with a company operating in a seasonal business. It is a concern that the current ratio slightly eroded after 1995, and this is primarily due to Be Our Guest converting the bank line into long term debt in

What are the advantages of leveraging this company? The disadvantages? How would leveraging up affect the company’s taxes? How would the capital markets react to a decision by the company to increase the use of debt in its capital structure?

In addition, as we are comparing the profit margin and operating profit margin, we notice that interest expense, from 2006 to 2010, consumed a relative small portion of sales proceeds comparing to 2011. In 2011, the profit margin for HH is -1.46% and the operating profit margin for HH is -0.74%. Since profit margin includes interest expense in the calculation while operating profit margin does not, we can conclude that HH has about the same amount in interest expense as the amount of operating loss before interest. This finally doubles the amount of company’s loss at the end of the cycle. This big amount of interest expense leads us to study HH’s leverage ratios.

Nevertheless, the use of the Optimal Capital Structure (OCS) is the right techniques to be used in order to acquire the right combination of debt and equity that can maximize the

This debt ratio is concerning and hints that the brewery may have difficulty paying its

Torres’ common-size financial statements also show the changing composition of Costco’s financing structure over time. The fact that interest expense consistently fell over the five year span from -0.35% of net sales in 1997 to -0.09% in 2001 demonstrates Costco’s ability to reduce its overall amount of debt during these years. Exhibit nine’s balance sheet portion supports this reduction, documenting an increase in total current liabilities from 35.86% of total assets in 1997 to 40.76% in 2001 and an increase in accounts payable from 25.46% of assets in 1997 to 27.03% in 2001. This signifies that the company’s debts or obligations due within one year increased, further corresponding with the fact that short-term borrowing increased from 0.46% of assets in 1997 to 1.93% in 2001. With an increase in short-term borrowing it is logical to expect to see a decrease in long-term borrowing. The income statement proves that this is indeed the case, documenting a decrease in long-term debt from 16.74% of sales in 1997 to 8.52% in 2001. This relates back to the decrease in Costco’s interest expense on the income statement, representing the company’s decision to switch to short-term and away from long-term methods. Furthermore, the decrease in long-term debt helped account for a decrease in total liabilities from

Du Pont's financial policy had always been based on maximization of financial flexibility. Taking to consideration the riskiness of Du Pont's businesses, its competitive position and profitability had declined in the last 20 years. Moreover, the firm is still forced to seek external financing each year for the next five years (1983-1987) due to the continued high level of capital expenditures which are considered non-deferrable to redress the causes of poor performance. In view of the importance and magnitude of the projected financing needs, the firm is concerned about how the cost and availability of debt

The company lost money almost every year since its leveraged buyout by Coniston Partners in 1989. The income generated was not sufficient to service the interest expenses of the company which stood at $2.62B in 1996. From Exhibit 1, we can say that interest coverage ratio computed as EBIT / Interest Expense was 1.31 in 1989 and has been decreasing over years and currently stands at 0.59. This raises a question of how the company can meet its interest payments without raising cash or selling assets.

Diageo’s mixture of the short- and the long-term debt and the currencies can be a subject for concern: having 47% of the debt was raised via short-term commercial papers and thus exposing the company to the refinancing risk in case of the adverse changes in the interest rates. Currencies’ mixture of debt was also quite concerning: with the ca. 50% of operating profits

Secondly, we can see that the credit rating of the company is A+, practically an average of what the parent

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

The advantage of debt financing is that interests paid on such debt are tax deductible. If a company has the intention of maintaining a permanent debt, the present value of the tax shield can be obtained by discounting them by the expected rate of return demanded by the investors who hold the debt (this is a perpetuity, where in reality would be the maximum possible present value for the tax shield). This tax shield value reduces the tax bill and increases the cash payment to investors, increasing the value of their investments.

Although not quite as conservative as other UK firms (with Equity/Assets ratios of 42%), it was successful in achieving these goals and retaining a credit rating of A+ (a rough average of Guinness’ AA and Grand Met’s A ratings) by re-levering the firm via