Financial Analysis of Capital Structure Term Paper

Financial Analysis of nifty Structure - Term wallpaper ExampleThe decision regarding finding the optimum jumble of equity and debt capital depends on capital spending, expect returns, optimum levels of debt, liquidity, cash levels, use up pastures and risks, and dividend policy (Mallicoat, 2011). The following is a snapshot of the possible Capital Structures that contention Bikes Inc. could acquire while expanding to Canada. The following were the picks available while choosing the rightfield Capital Structure mix 1. Capital Structure consisting to a greater extentover of bonds 2. A capital structure consisting of only stocks, with 50% preferred and 50% viridity Stock 3. With 20% bonds and 80% common stock 4. Capital Structure consisting of bonds of 40% and Common Stock 60% EPS (Earning Per Share) is the portion of companys profit that is allocated to each share of the common stock. It is the near important measure or figure for any shareholder. However, we would analyze th e capital structure not only according to the EPS but also analyze the risk intact in the capital structure. The first alternative of the capital structure comprising only of bonds would allow the company to borrow capital at an interest rate that is lower than the interest rate for other types of borrowing. Bonds are written promises to pay back specific union at a certain date and some interest payments at specific rates. They are bonny similar to the conventional loans with a few perks. Debt financial backing is favorable than equity financing as interest expense is tax deductible. However, one problem with this form of capital structure is that it is more risky as corporations are required to make interest payment even when they are not making salary making them vulnerable to bankruptcy and solvency (Brown, 2006). The EPS of this capital structure is also lowest at -0.042 under the rate of flow scenario. Hence, having the capital structure completely rely on bonds is a very risky option, specifically for argument Bikes Inc. when they are expanding and exploring new opportunities. The second alternative is of 50% preferred stock and 50% common stock. preferent stock offer dividend incentive to the shareholder as they are second in line to be paid after the bond holders when a company is facing a loss making them more risky than the common stock. Common stocks are favorable for companies with good financial health. However, the risk of losing ownership is inherent in common stocks as stock holders have the right to elect the board of directors. Moreover, equity financing is more valuable than debt financing and it is not feasible for a capital structure to be only based on it (Other ways of raising capital stocks and bonds, 2011). Therefore, the Capital Structure must include both(prenominal) debt and equity financing. All the third, fourth and fifth alternatives are mix of equity and debt financing. We need to find the right kind of mix between e quity and debt. As debt is more risky and equity is more expensive and the objective of the companys capital structure is to maximize shareholder return, we cigaret decide on the basis of Earning per Share (EPS). EPS is the earning of each outstanding share. An important aspect of EPS is the capital required to generate the income utilize in the calculation of EPS. As all our Capital Structure alternatives use the same amount of capital, we can decide on the basic of the highest value of EPS while keeping the risk factor under check. Since Competition Bikes Inc. is expanding in Canada, they need time before they can start making large