Competition Bikes, Inc. Task - 3

Competition Bikes, Inc. Task - 3

Capital Structure with Recommendation

If a Competition Bikes, Inc. wants to maximize its stockholder's return, then the preferred capital structure must be 50 percent of the common shares and 50 percent of the preferred shares. This is the best approach for strengthening the financial performance of the firm, i.e. total capital structure should be divided equally among the common shares and preferred stocks, since it will result in escalating the returns of stockholders. A concrete capital structure will optimize the stockholder's value and improve the overall value of a firm. Additionally, in case of Competition Bikes, Inc. it is critical for the company not to lose their focus on their product's quality as well as their consumer services, if they want to compete successfully in the market.

Basically, the capital structure refers to the manner that is used by the company to finance its assets via various mixtures of liabilities, which are items at balance sheet's right hand side. Normally, this is stated as the percentage of each capital piece utilized by the common equity, debt, and preferred shares of the organization. Therefore, a capital structure of an organization is a combination of its common as well as preferred shares, debt, and overall all financed operations of an organization as well as growth by using diverse means of funds.

The notes payable as well as the bonds issuance is a part of debt financing, on the other hand, retained earnings as well as preferred shares are a part of equity of a firm. Additionally, a short run debt, which is a need of working capital and is also undertaken as a portion of capital structure. So, in this case the total components of capital that required to be analyzed include equity capital and debt capital. As it is expressed that the debt capital consist of long run debt for example bank loans, this type of debt is much costly as compared to the equity and therefore also constitute of greater return. On the other hand, equity capital consists of capital that has been given by the stockholders and associates greater risk.

For justifying the given recommendation, a data provided in Task 3 capital structure of spreadsheet is used. EPS is the key item that is analyzed by the investors; the data indicates that the highest EPS is of 50 percent common stocks and 50 percent preferred stocks with the increasing years. Such as in year 9, the highest EPS is of 20 percent bond and common shares, and 50 percent common shares and 50 percent preferred shares consist of 0.032 EPS, in year 10 the EPS of the option is 0.043, whereas in year 11 the EPS of 50 percent common and 50 percent preferred shares has the highest EPS of 0.055, further in year 12 and in year 13 the EPS of this option is 0.0637 and 0.074, respectively. Thus, it indicates that the option of 50 percent common shares and ...