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 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 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.

Provide a brief evaluation of this assignment.

Note:Report/assignment will not be accepted without proper citations and references. You must use the sources from the background material together with the sources you find on your own. It is alsorequiredthat you answer all the questions related to learning outcomes.

AssignmentExpectations

  • Describe the purpose of the paper and provide a conclusion.
  • Answer the SLP questions clearly and provide necessary details and calculations. Review “Tips for Good Writing” [ and a guideline to write awell-structured paper.
  • Write clearly and correctly—that is, no poor sentence structure, no spelling and grammar mistakes, and no run-on sentences.
  • Provide citations to support your argument and references on a separate page. Use APA format to provide citations and references [
  • Answer all the questions in an essay format. Do not type questions in the paper.
  • Type and double-space the paper.

The following criteria will also be used to assess your paper:

>Precision:Does the paper address the question(s) or task(s)?

>Breadth: Is the full breadth of the subject addressed?

>Depth: Does the paper/report address all elements of the topic in sufficient depth? Does it include and apply the background reading and other background resources? Are they included as references?

>Critical thinking: Are the concepts of this module applied accurately, logically, and relevantly?

>Organization:Is the paper organized in a coherent and systematic manner? Are headings included in all papers longer than two pages?

>Clarity:Is the writing clear and are the concepts articulated properly? Are paraphrasing and synthesis of concepts the primary means of response to the questions, or are thoughts conveyed through excessive use of quotations?

In addition, this paper will be graded with the following criteria in mind:

A. Provide a direct answer to all three assignment questions—focus only on these three questions.

B. Reference all of your sources of information, both within the text as well as with a bibliography at the end.

C. For all calculations, show all of your work and demonstrate that you understand the steps.