Your Company’s Data Calculate all of your data in a new worksheet in your case workbook. Reference cells from financial statements to calculate ratios. 1. Debt/Capital – Measuresthe amount of debt relative to total capital investment (debt plus equity).Calculate this by referencing your company’s most recent balance sheet. 2. Debt/EBITDA – Measures the amount of debt relative to earnings available to pay that debt. This is just another way of thinking about how much debt a firm has. For example, a company may have high debt relative to total capital but low debt relative to earnings available to pay the debt.

Case 3: Capital Structure

Due April 18^th at the beginning of class.  Share your memo with editing permissions. 

You will find or calculate each value for your company and for your company’s industry.  Find the industry data in the spreadsheet by following this link:  http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/dbtfund.html

Explanation of Data

Your Company’s Data

Calculate all of your data in a new worksheet in your case workbook.  Reference cells from financial statements to calculate ratios.

1. Debt/Capital – Measuresthe amount of debt relative to total capital investment (debt plus equity).Calculate this by referencing your company’s most recent balance sheet.
2. Debt/EBITDA – Measures the amount of debt relative to earnings available to pay that debt. This is just another way of thinking about how much debt a firm has.  For example, a company may have high debt relative to total capital but low debt relative to earnings available to pay the debt.
3. Effective tax rates – provides information about the value of the tax shield – the higher the tax rate, the greater the value of the tax shield which would indicate more debt.Calculate thisby referencing your company’s most recent income statement.
4. Standard Deviation – Risk measure, the greater the risk, the more uncertainty about the ability to meet fixed expenses, also means a higher level of business risk. Higher risk should lead to lower relative leverage.For your company’s standard deviation download 5 years of weekly prices.  In Excel, sort from oldest to newest.  Calculate weekly returns.  Use function STDEV to find the standard deviation of those returns.  Annualize the standard deviation by multiplying the weekly return by 15.87451.
5. Fixed Assets/Total Assets – companies with a larger amount of fixed assets typically have more debt. For one thing, fixed assets can be used for collateral.Calculate this by referencing your company’s most recent balance sheet.
6. EBITDA/Value – available cash flows from operations – a higher percentage means there is more operating income to pay toward fixed debt expenses, however, it can also indicate a lower need for debt because there are more cash flows available for capital investment (greater retained earnings). For your company’s EBITDA/Value, Calculate EBITDA/Total Assetsby referencing your company’s financial statements.
7. Capital Spending/Total Assets – Indicates the capital need of the company. A company that tends to have more capital investment has a greater need for capital.  A larger percentage can indicate a greater investment in growth.

For your company’s Capital Spending/Total Assets, find your company’s Cash Flow Statement. Find “Capital Expenditures” for the most recent year.  (You will see a negative number here.  This is as expected because capital spending is an outflow.  For your computations, ignore the negative sign.) Reference Total Assets on the balance sheet.

“Memo”

For each value, compare your company to the industry, total market, low-debt firms, high-debt firms.  Discuss the ways in which your company’s capital structure is explained (or not) by each variable.  Determine the dominant driving factor for company’s capital structure.

Note:  Submit in Memo format.  (Exclude all instructions, but you may keep the tables if you like.)  I expect that all of your data and computations are in your case workbook (all of your case spreadsheets should be on separate worksheets in one Excel workbook.)