Presentation

Running Head: CAPITAL STRUCTURE 1

CAPITAL STRUCTURE 5

Capital Structure

David Pursell

B330/GEB3020 Rasmussen College

9/3/19

Capital Structure

Capital structure is the objective combination of debt, the given stock in addition to the common stock and it increases the market value of the organization. To calculate this structure for Gentry we will calculate the WACC in order to be able to establish the risk that will make the return that is anticipated from the capital, which has to be greater than the capital cost. (Graham 2015)

This will be evaluated by determining the debt cost, and cost of common market, which will be multiplied by cost of debt. This is as indicated below;

OPTIMAL CAPITAL STRUCTURE
LEVERAGE	10%	10%	20%	30%	40%	50%
COST OF DEBT	9%	9%	10%	10.50%	11%	14%
COST OF EQUITY	9%	10%	9.50%	10%	12%	14%
MARKET VALUE($)	520,000	540,000	515,000	530,000	500,000	450,000
BOOK VALUE	500,000	500,000	500,000	500,000	500,000	500,000
BOOK VALUE DEBT RATIO	0%	10.00%	20%	30%	40%	50%
MARKET VALUE DEBT RATIO	0%	6.50%	14%	22%	30%	40%

The above structure will work best for the firm, the ratios are also discussed in details in the following paragraphs;

Too much debt is an indicator of an increased financial risk to the shareholders, hence in this model the debts are very minimal. The main goal of this firm in question will be to establish the model that will lead to the least amount of WACC and increased shareholder wealth. With tax information, financial leverage increases the net worthy of the firm and reduces WACC.

The difference in borrowed money for investment does not have any effect the general performance of the firm. The debt cost is seen to increase from 9% to 14%. The other parameters are also seen to increase accordingly with exemption of profit.

The debt cost together with the common stock show the return that will be on the debt so that that people having investments may be able to buy the stock of the company. The amount of money borrowed for investment is seen to take an increment from zero to fifty. The debt cost and the common stock increase in that manner, indicating that individuals on investments need a bigger return to take care of increased risk chances.

It is clear that a WACC of a percentage of ten increases the value of the organization ($520,000 as indicated in the table), hence optimal stock is calculated as follows for the firm;

Debt is cheaper than equity hence the optimal structure above is necessary.

The company will need to offer a common stock of $550,000 in the IPO and assume a debt of $30 million to be able to meet the goal of $50 million assuming that the firms are in their global expansion. This because the company will be able to use different sources of funds to finance its operations. Debts offered in long terms are likely to lead to the gross growth of the firm. The debt of $30million when added to the equity yields to a substantial amount of capital needed for the expansion of the firm.

The company should offer an equity (common stock) of a dollar amount not less than $40 million. This should be offered to the IPO. The company will use a debt of $30 million to reach the $50 million expansion goal. (Serfling 2016)

References

Graham, John R., Mark T. Leary, and Michael R. Roberts, M. R. (2015). The leveraging of corporate America. Journal of Financial Economics, 118(3), 658-683.

Serfling, M. (2016). Firing costs and capital structure decisions. The journal of finance, 71(5), 2239-2286.