Du Pont Paper Capital Structure Case

Diageo was created when Grand Metropolitan, plc and Guiness, plc merged in 1997. While the Diageo name is not well known to consumers, its brands are among the most famous including Guinness, Smirnoff, Johnnie Walker and Cuervo. The company recently decided to focus on a strategy to grow through its spirits, wine and beer businesses and divest of its Pillsbury and Burger King subsidiaries. This case study will focus on the proposed capital structure decisions of Diageo.

Andrea Winfield considered issuing bonds was not a good option for financing the acquisition. She was particularly concerned about the increasing long-term debt and annual cash layout of $ 6.25 million for 15 years. We believe that her concerns are justified, because the Company had already significant amount of debt that could result in higher risks and stock price

After carefully reviewing the income statement, balances sheet and cash flow it seems that the company has a negative cash flow for 1998, so even before thinking about obtaining internal and external resources for long term investment, the company must assure resources for their own working capital.

2. Forecast the firm’s financial statements for 2002 and 2003. What will be the external financing requirements of the firm in those years? Can the firm repay its loan within a reasonable period? In order to forecast the financial statements of 2002 and 2003, the following assumptions need to be made. The growth of sales is 15%, same as 2001, which is estimated by managers. The rate of production costs and expenses per sales is constant to 50%. Administration and selling expenses is the average of last 4 years. The depreciation is $7.8 million per year, which is calculated by $54.6 million divided by 7 years. Tax rate is 24.5%, which is provided. The dividend is $2 million per year only when the company makes profits. Therefore, we assume that there will be no dividend in 2003. Gross PPE will be $27.3 million (54.6/2) per year. We also assume there is no more long term debt, because any funds need in the case are short term debt, it keeps at $18.2 million. According to the forecast, Star River needs external financing approximately $94 million and $107 million in 2002 and 2003, respectively. In order to analysis if the company can repay the debt, we need to know the interest coverage ratio, current ratio and D/E ratio. The interest coverage ratios through the forecast were 1.23 and 0.87 respectively, which is the danger signal to the managers, because in 2003, the profits even not

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.

In January 1980, the management of the Marriott Corporation found itself in an interesting dilemma: not only did the corporation have considerable excess debt capacity, but projections of future operations and cash flows indicated that this capacity was on the rise. For Marriott, excess debt capacity was viewed as comparable to unused plant capacity because the existing equity base could support additional productive assets. Management was therefore faced with two problems. First, it needed to determine the amount of funds that would be available if Marriott's full debt capacity were utilized. Second, management needed to decide whether to invest excess funds in new or existing businesses, or to return them to the companies shareholders

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

The company currently faces serious financial challenges. It was struggling with declining sales and increasing costs. Since 2004, revenues had fallen by more than 40% while costs especially for employees health insurance, maintenance, and utilities climbed. Credits and loans had been borrowed to

In July 2002, an investment banker advising Deluxe Corporation must prepare recommendations for the company’s board of directors regarding the firm’s financial policy. Some special considerations are the mix of debt and equity, maintenance of financial flexibility, and the preservation of an investment-grade bond rating. Complicating the assessment are low growth and technological obsolescence in the firm’s core business. The purpose is to recommend an appropriate financial policy for the firm and, in support of that recommendation, to show the impact on the firm’s cost of capital, financial flexibility (i.e., unused debt capacity), bond rating, and other considerations.

The purpose of the report is to understand the capital structure of the chosen company on the basis of the financial statements of the company which includes the income statement, balance sheet and the cash flow statement of the company and do the capital analysis of the company as well to find out the advantages and disadvantages in working capital of the company and suggest company logical and useful ways for growing their economy.

The company is hoping to make a decision that can improve the efficiency of its operation with sound a strategy to reduce costs as well as increase performance. They must manage the inputs with the outputs to achieve the appropriate competitive priorities of the firm’s enterprise processes. With their borrowing ability reduced due to manufacturers offering no credit and retailers demanding payment within the same cycle of 30 – 60 days, Brunswick is placed in a position of exhausting their borrowing ability and another loan would be difficult to obtain, a solution would be to consolidate their debts, engage discussions with a financial institution that would willing to buy the debt from the original loaner and willing to apply less interest rate thus raising the loan limit so the company can borrow more.

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

Chevron operates in the hydrocarbon industry, where it is one of the world's largest companies with sales of $241.9 billion and net income of $26.18 billion. It is the conclusion of this analysis that a creditor should lend Chevron an additional $20.9 billion. The company has the liquidity, solvency and the cash flow to pay back this amount of debt. The company currently finances its operations largely from operating cash flows, with a small amount of long-term debt. This low debt level has left the company with a balance sheet strong enough to withstand a further $20.9 billion in debt. As a lender, it has been found that Chevron meets all of the lending

U.S. Semiconductor, a semiconductor manufacturer decided to expand their business to UK market in 1980. Their new business plan needed specialized technical support facility in UK. In order to minimize the equity investment, they decided to fund their assets mostly with debt. As Semiconductor owned subsidiaries, which spread all over the world, they face great exchange risk. Besides, instead of building a production department in UK, Semiconductor kept producing their products domestically and delivered them to UK by plane. British firms also confronted exchange risk due to the difference between import costs and sales revenues. This case mainly involves the discussion on the method of debt funding.

The financial analysis of the balance sheet shows that the percentage of equity in the sources of funds is decreasing while the debt is escalating. Short term liability has compounded from 14% to 39% while long term liability had increased from 16% to 24%. The Debit/equity ratio shows an almost double increase in dependence on borrowed funds between 2007-2008, leading to a greater obligation of fixed interest payment, and a lessor safety margin for long term creditors. An increasing Debit-equity ratio can also create difficulties in raising additional loans. This triggered a potential lack of future financing, considering that Gerhard Schroder property developer had indicated that he was unwilling to continue to provide financial support to the organization. Additionally, they