Reference no: EM13899497

The capital structure decision and the cost of capital

Balance Sheet and Market Value of Your Company's Liabilities and Equity

Refer to Starbucks' Corporation most recent balance sheet. Review the "liabilities and equity side" of the balance sheet.

(a) Short-term liabilities (or debt) and long-term liabilities

Find out from the balance sheet of the company the total of the short-term liabilities (also called "short-term debt") and long-term liabilities (also called "long-term debt").

(b) Equity

The market value of equity is by definition equal to the number of shares outstanding times the market price per share. Find out the number of shares outstanding and the recent price per share. Then multiply one by the other in order to find the market value of equity of your company. If you have a problem finding out the number of shares outstanding, you may go to https://finance.google.com and insert the name of your company. The market value of equity of your company is what is called "Mkt Cap," or market capitalization. An alternative site is https://finance.yahoo.com where you may insert your company's name and get the market capitalization.

Once you have this information, prepare a 2- to 3-page paper with the following:

1) Compute the debt ratio of your company (total liabilities divided by the total liabilities plus equity) and the debt-to-equity ratio (total liabilities divided by total equity). Show these two ratios for short-term liabilities only and for long-term liabilities only (instead of total liabilities, use just short-term liabilities and long-term liabilities). Show all of your work and calculations.

2) Give your recommendations as to whether or not you consider these ratios to be too small or too large. Should Starbucks

Corporation increase its debt or take steps to pay off its debt?

3) Compute the debt-to-equity ratios for two other companies in the same industry as Starbucks Corporation. Which of these three companies has the highest debt-to-equity ratio, and why do you think it chose to have a relatively high ratio? Which of these three companies has the lowest debt-to-equity ratio, and why do you think it chose to have a relatively lower ratio?

4) What do you perceive you have learned from this assignment? Which of the following learning outcomes do you feel you have mastered?

• Identify and discuss the concept of optimal capital structure.

• Discuss the advantages and disadvantages of debt financing and of equity financing.