Wednesday, January 29, 2020

Capital Structure Essay Example for Free

Capital Structure Essay Capital structure is how a company finances its overall operations and growth by using funds from equity or debt (Investopedia, 2012). Of course, every company must determine its preference on its debt-to-equity ratio and determine which capital structure works best for them. Some approaches to analyzing capital structure are: 1.EBIT – EPS: This analyzes the impact of debt on earnings per share (EPS). Optimizing shareholder’s wealth is the optimum goal and therefore, this approach analyzes the high EPS based on an expected range of earnings before income taxes (EBIT). 2.Valuation: Determines impact of debt use on shareholder’s value by determining the level of debt at which the benefits of increased debt no longer outweigh the increased risks and expenses associated with financing (Wenk, 2012) 3.Cash Flow: Analyzes a firm’s debt capacity by using the weighted average of cost of capital (WACC). The WACC is a calculation of a firm’s cost of capital in which each capital source (bonds, stock and other long-term debt) are proportionally weighted to determine how much interest the company has to pay for every dollar it finances (Investopedia, 2012). Look more:  capital budgeting examples essay Part of Competition Bikes’ (CB) main consideration in the decision to merge or acquire Canadian Biking is working capital. Lets use the EBIT – EPS approach to determine how to maximize shareholder return while minimizing the cost of capital. We currently know Canadian Biking’s moderate sales forecast of EBIT figures for the next 5 years (Year 9 – 13), therefore we can apply the EBIT – EPS approach to choose an optimal capital structure. The total of capital sources in each of the 5 years is $600,000. We will use EBIT – EPS to determine which assortment of bonds*, preferred stock, and common stock is the best option to increase Canadian Biking’s EPS. The five alternative capital structures include: Option 1: 100% Bonds (fully financed) Option 2: 50% Preferred Stock 50% Common Stock (no bonds) Option 3: 20% Bonds 80% Common Stock Option 4: 40% Bonds 60% Common Stock Option 5: 60% Bonds 40% Common Stock *Annual bond interest rate is 9% After using the EBIT – EPS approach using the forecasted EBIT amounts for Years 9 through 13, we can average the EPS for each of the 5 years to determine which capital structure produced the highest EPS. The EPS averages computed for the capital structure options are: Option 1: Average EPS = .0452 Option 2: Average EPS = .0542 Option 3: Average EPS = .0526 Option 4: Average EPS = .051 Option 5: Average EPS = .0494 Based on the EBIT – EPS approach, the recommended capital structure is option 2, â€Å"50% preferred stock 50% common stock†. This is the best capital structure mainly because there are two things to consider: 1) long-term debt and associated interest expense and, 2) equity and # of common shares. Option 2 is the best capital structure because there are no bonds and therefore, no interest expense. For example, if we look at option 1 in Year 9, and the bond interest is 9%, then the bond interest expense is $54,000 (.09*600,00). This lowers the income before taxes by $54,000. Although companies can finance debt and use the interest expense deduction to lower their taxable income, it doesn’t make sense for Canadian Bikes to fully finance their capital, because the interest expense costs outweigh the benefit of the tax deduction, resulting in a significant decrease in total income available for common stock. Additionally, because the capital structure consists of 300,000 shares of preferred stock, the company must pay dividends of 5%, reducing the company’s total income available for common stock by $15,000 (.05 * 300,000). Although this reduces the total income available for common stock, the company will maximize its EPS by only having 50% capital in common stock. This reduces the total number of common shares outstanding, which means less shares to divide the total income among. Therefore, Option 2 is the most optimal capital structure that considers minimizing long-term  debt expenses and the optimal number of common shares in order to maximize shareholder return. CAPITAL BUDGETING: Competition Bikes’ is considering building a manufacturing facility in a new Canadian location. The total investment for this project would be $600,000 USD. This consists of $400,000 to build the facility and an additional $200,000 in working capital to support operational costs. The company has projected cash flows over the next five years; therefore we can use cash flow budgeting methods such as net present value (NPV) and Internal Rate of Return (IRR) that consider time value of money for long-term investments (Pearson Education, Inc., 2008). Net present value analyzes the profitability of a project by determining the difference between the present value of the project’s cash inflows and outflows followed by subtracting the initial investment. (Investopedia, 2012). The decision rule applied to NPV is fairly simple, if the NPV is positive, invest; if the difference is negative, do not invest. Competition Bikes applies NPV to forecasted low and moderate sales for the next 5 years. After using the forecasted sales for low demand, the total present value (after subtracting cash outflows from inflows) is $560,719. If we subtract the initial investment of $600,000 from this amount, the NPV is -$39,281. This is a significant warning that the company should not proceed in building a manufacturing facility. On the other hand, if we use the forecasted sales for moderate demand, the total present value is $608,447. If we subtract the initial investment of $600,000, the NPV is $8,447. Therefore a positive NPV indicates the company should proceed with building the manufacturing facility. The biggest concern is determining which NPV to lean towards based on low or moderate sales. Unfortunately, the risk of having low sales outweighs the profitability benefit of having moderate sales. It is too risky for CB to move forward with the investment based on the NPV of low sales (-$39,281). In order for the company to profit from this investment, CB would need to have a moderate sales demand at minimum! The present value in NPV is calculated using an interest rate, also known as the required rate of return. CB’s required rate of return is 10%. When this interest rate is altered or calculated to make the total present value equal to the initial investment, the NPV becomes equal to zero; this is called the internal rate of return (IRR) (Pearson Education, Inc., 2008). The IRR is what a company can expect to earn from investing in the project and the higher the IRR, the more desirable the investment. The calculated IRR for low demand cash flows is 8.2% and the IRR for moderate demand cash flows is 10.4%. Based on these IRR figures, the company should not pursue the capital investment because the average IRR between both low and moderate sales is 9.3%. This is below the company’s required return on capital (hurdle rate) of 10% to pursue a capital investment. Again, the company would need to have a moderate sales demand, at minimum for this capital investment to be profitable and should therefore not pursue building a new manufacturing facility. WORKING CAPITAL: CB must effectively obtain and manage working capital for the expansion of the operation. CB must first look at their operating cycle, cash conversion cycle and free cash flow factors in order to improve production and management of working capital. Let’s discuss the company’s current status of each of the working capital and cash flow factors and determine how the company can improve in these areas. First, the operating cycle involves CB sending the distributor a monthly invoice for all raw materials ordered with terms of net/30 days. This can be improved by renegotiating the payment terms will distributors to net/15 days. This would increase cash flows by improving payment turn around time and accounts receivable collections. Additionally, the company can improve its relations with its distributers to increase effectiveness of its collection process. Another operating cycle factor is ordering and paying for inventory. Currently, the company pays for inventory in the month following production and all inventory ordered for the month is used leaving inventory levels (at the end of each month) at consistent levels. In order  to improve working capital the company should utilize and lower its year ending inventory balance. For example, at the end of Year 8, the company had $91,573 worth of inventory left over. The company should utilize the current inventory on hand before ordering similar raw material items. This will decease cash flows and leave fewer inventories on hand at the end of the year. Currently the average time in inventory is 25 days. This is a substantial turnaround time currently, however in the future, the company can consider replacing labor workers with fixed asset items to improve production time. This will satisfy customer demand by decreasing delivery time and improve cash flows by invoicing customers more frequently than 25 days after production. CB’s cash conversion cycle factors also impact working capital. Currently, the CB’s suppliers invoice at the end of the month for orders that month with terms of net/15. CB does an excellent job of preserving its cash flows by paying the invoices on the 15th of the month following the order.. CB can improve its working capital by negotiating for longer payment terms, i.e. net/30 days, allowing for more time for the company to earn money to pay their invoices. If this is not possible, the company can improve its forecasting measurements for ordering supplies and order the majority of the supplies needed for the month at the beginning of the month. This would increase the amount of time the company has sufficient supplies on hand without having to pay more money, (because the suppliers will still invoice for the orders at the end of the month, regardless of how early in the month the supplies were ordered). This can increase working capital because it acts as a contingency plan, to reduce the likelihood of running out of supplies, avoiding delays, or ordering supplies in excess. Free cash flow factors also affect CB’s working capital. Currently, the company recognizes depreciation in both manufacturing overhead and as depreciation expenses depending on the fixed asset. The company can use their depreciation data to increase management of cash flows by predicting when the company will have to spend a significant amount of money to replace an asset when its useful life expires. This will prepare CB for those unwanted although necessary – fixed asset costs. Currently the  corporation’s marginal tax rate is 25%. The company can consider obtaining working capital by financing debt. This will leave the company with an interest expense at the end of the year, which is deductible from gross earnings and results in paying lower taxes. After CB improves its working capital, let’s discuss how CB can use its working capital for the lease vs. buy option for a factory building in Canada. CB can use its working capital to cover the $50,000 down payment (or buy out option if they decide to lease) and $200,000 for operational costs of the new factory. According to the data provided for the lease vs. buy option, the lease option will preserve cash outflows of $12,339, (purchase cash outflows are $333,999 and lease cash outflows are $321,660). Therefore, the company should lease the manufacturing facility to preserve cash outflows. Leasing the facility will also allow CB to deduct annual interest payments (6% interest) from the gross earnings to lower their tax payments. This will increase the company’s net earnings at the end of the year, also resulting in higher retained earnings and increased shareholder value. MERGER OR ACQUISITION: CB should consider many factors when deciding to merge or acquire Canadian Biking. Let’s analyze the pros and cons between a merge vs. acquisition and determine what the best move would be for CB. First off, if the company were to merge with Canadian Biking, the potential EPS would increase by approximately .021. This shows potential for increased ownership earnings, but is it significant enough? At the same token, the price/earnings ratio for Canadian Bikes at the end of Year 8 was 9 and CB’s was 70. This shows that CB’s current investors are expecting greater earnings in Year 9 and are willing to pay $70 for $1 of current earnings. This is not the case with Canadian Biking’s investors. Unfortunately a low P/E ratio of 9 indicates that investors are not expecting a significant growth in company earnings. This raises a concern if the merge will result in a potential increase of .021 in EPS. On the other hand, a merge would result in lower costs because CB would not be purchasing Canadian Biking outright. Canadian Biking also has a lower cost competition bike that can decrease production costs and complement CB’s current bike model being offered. This will result in  greater net earnings and cash flows. If the company were to acquire Canadian Bikes, CB can expect a gradual increase in cash inflows over the next 5 years. However, the current offered sales price for Canadian Biking is $286,000; this is 30% more than what the company was valued at, at the end of Year 8. Although CB has enough working capital to make the purchase, it would take 5 years of gradually increasing cash inflows to recoup the price tag of $286,000. This means it could take approximately 5 years, before shareholders saw a significant increase in earnings per share. Based on the pro and cons, CB should merge with Canadian Bikes to lower their production and delivery costs, increase net income, EPS and cash flows, and preserve working capital. The price to acquire Canadian Biking is simply unreasonable based on predicted cash inflows over the next 5 years. The merger will enhance CB’s market position in Canada by having a local distributer to handle all customer orders and provide cost effective and great customer service to the growing Canadian market. References Investopedia. (2012). Capital Structure. Retrieved from Investopedia. (2012). Weighted Average Cost of Capital. Retrieved from Investopedia. (2012). Net Present Value. Retrieved from Pearson Education, Inc.. (2008). Horngren Accounting. Retrieved from Wenk, D. (2012). Using an optimal capital structure in business valuation. Retrieved from

Tuesday, January 21, 2020

music in education and health :: essays research papers

MUSIC AS A TEACHING AND HEALING TOOL Music is a remarkable tool to be used to dramatically increase learning and healing in the classroom. Its successful role has been documented throughout the academic community, yet, its use has not been widely utilized by teachers. Since Aristotle, music has been considered one of the forces used to teach. Moreover, for more than half a century the psychiatric and the educational communities have studied, analyzed and implemented the use of music as a healing tool and as a way to enhance the mental capacities of their respective group of studies. It has been discovered in controlled settings that certain type of classical music would enhance the student’s concentration time. The specific issues addressed by the study and practice of music has been divided into specific areas of the mental process. For example, learning a musical instrument helps the students the skill of repetition as a method to learn and to recollect information. Creativity and imagination also are improved when the student or the patient is taught basic concepts of musical composition. It is believed that music unleashes creative forces within a human being that are only accessed with artistic endeavors. Even abstract traits like sensibility are retrieved with music studies and the practice of a musical instrument. There is a perceptible connection between learning and music that teachers should exploit in the learning environment, regardless of the age of the student. Music could be used effectively from the time the child is in the womb and right through the formative years. While addressing the healing benefits of music it is noted the array of uses for this art. Every body in all aspects of life, to enhance moods, to depress moods, to pacify, or to reminisce, uses music. Clinicians have experimented with this art for various decades. Psychiatric patience are administered a dose of soothing music to lower the anxiety levels. Office managers utilize it to energize the work place. Learning centers use baroque music to enhance memory skills. Health experts praise the rewards of music in the digestive and central nervous systems, the enhancement of attention spans of patients of HDD and in addition promote interaction in persons who struggle with their self-esteem. Some specialists even use the term music therapy when using it to treat certain cognitive or emotional problems. Music as a therapeutic tool is not only restricted the use of recorded material or the playing of musical instruments.

Monday, January 13, 2020

Franklin D. Roosevelt vs. Barack Obama

Franklin D. Roosevelt vs. Barack Obama The economy of the 1930s was a devastating financial situation that the American public will never forget. However, this doesn’t mean that history will cease to repeat itself. The political policies of Franklin Delano Roosevelt are often acknowledged for the relief of our country’s depression and some of which are still in effect today. To avoid our current recession, will Barack Obama choose to base his policies off of FDR’s in hopes that the same plan will work twice?There are some similarities and differences between the political action today and the action during the Great Depression. Within just the first 99 days of his election as President, Roosevelt’s New Deal was put into action with the support of Congress. The New Deal was proposed to help relieve those who were unemployed or in danger of losing their homes and recover agriculture and business. Programs such as the Tennessee Valley Authority, Social Securi ty, and Medicare were created because of Roosevelt’s action in the Great Depression.Herbert Hoover, the preceding president, did not feel that government spending should be given directly to citizens. He believed that ‘helping’ the American people in this way would actually hurt their morale and cause them to become more like a socialist nation. Certain ideas such as enforcing fixed pricing, controlling businesses, and manipulating the value of currency were suggested and quickly declined by Hoover who believed all were Socialist ideas. Though many people saw Hoover as an evil man that refused to give away federal money, he was actually quite accurate with his predictions.For example, Welfare, which is a program used today that was created in the New Deal, is often misused today by people who are capable of working, but are too lazy to actually make their own income source. I believe that a lot of Americans today are spoon fed because of the government ‘hel p’ that they receive. Though Roosevelt did help in the Great Depression, his temporary ideas were turned into permanent solutions that have caused new damages today. Now our current President is forced with the decision to either help the public with temporary ideas like Roosevelt’s or look out for what is best for our future like Hoover.It’s not an easy decision. Barack Obama has made an impact in our economy in areas similar to Franklin Roosevelt. He has created jobs and packages, like Obamacare, that he believes will help American citizens. Obama helped bail out the auto industries similar to how Roosevelt helped bail out the banks during the depression. However, Barack passed the Wall Street Reform (which helped the American financial system be less confusing and more apparent) to make sure that we would never have to bail out the banks again.Barack has also eliminated tax breaks for companies who ship overseas to try and promote American companies to create more jobs for the citizens who are here. In his term, Obama has added over 479,000 jobs which is the most growth we’ve had in a decade. He has spoken many times on how he plans to build â€Å"from the middle class out† rather than from the top down. Our middle class is of high importance to Barack and because of this, he has gained a tremendous support from the public.It seems that our current president has taken a few ideas from Roosevelt with the added caution of the foreseeable future. Our country looks like it’s headed in the right direction, but we may never know whether the help provided will be temporary until we live through it. As citizens, it would be the best for us to learn how to live on our own without the help of our government. If we were to become too dependent on our welfare checks or social security, then we could end up being controlled instead of governing ourselves.The best solution would to be to save our money and work hard at what we do . Though it may seem that there are no jobs available to us at the moment, we do have to trust that the companies around us will see it better to provide domestic jobs rather than sending them overseas. Though I don’t entirely agree with how Franklin D. Roosevelt tried to solve the Great Depression, I have to admit that what he did he thought he was doing for the best. Great presidents like Obama, Roosevelt, and even Hoover are great because they think of us and not themselves.

Sunday, January 5, 2020

Using the Different Forms of Pronouns

One of the basic parts of speech, a pronoun ​takes the place of a noun, often serving as a subject or an object in a sentence. Personal pronouns are important devices for making our writing both concise and coherent. A pronoun can be effective if we use an appropriate form (or case). Otherwise, it may distract or puzzle the reader. There are three common pronoun forms: subject pronouns, object pronouns, and possessive pronouns. We should try to be careful not to confuse one pronoun form with another. Subject Pronouns (Subjective Case) Subject pronouns are used as subjects of sentences and of subordinate clauses. The subject pronouns are italicized in the sentences below. I live for the summer.You remind me of a gray day in winter.He (or She or It) is heading for a fall.We are ready to spring into action.They never last longer than a season. Object Pronouns (Objective Case) Object pronouns are used as objects of verbs or of prepositions. The object pronouns are italicized in the sentences below. The sun never shines on me.Someday a planet will be named after you.Mona gave him (or her or it) a gold ribbon.She showed us the ring around the moon.The Coast Guard rescued them at dawn. Possessive Pronouns (Possessive Case) Possessive pronouns show who or what owns something. The possessive pronouns are italicized in the sentences below. My old guitar is in the pawn shop, but the drum set is still mine.*Your song was hard to understand, but I still enjoyed yours more than anyone elses.His (or Her or Its) music is too sweet, so we played hers (or his) instead.Our music may be old fashioned, but its still ours.The Simpsons left their children in the garage, but the McGraths took theirs home. Notice that you dont use an apostrophe with a possessive pronoun.* Some grammarians make a distinction between possessive determiners (such as my in My old guitar) and possessive pronouns (such as mine in the drum set is still mine. Practice in Using Correct Pronoun Forms These exercises will give you practice in using the different forms of pronouns clearly and correctly: Using the Different Forms of Pronouns: Practice Exercise 1Pronoun Exercise: Recasting a Paragraph With Pronouns