Task - 3

Financial Analysis: Task # 3: Managing Capital & Financial Assets

Capital Structure Recommendation

In order to recommend approach that maximizes shareholder return, Competitive Bikes should go for 50% of the Preferred stock and 50% of the common stock. The best approach to strength the company financial position is to divide the total capital structure equally between the preference and common shares as this will increase the shareholder value. Though a concrete capital structure would maximize the shareholders value as well as it will enhance the company's value. Beside this, it is crucial for Competition Bikes not loose their focus on the product quality and customer services in order to compete in the market.

The capitals structure is the way through which assets of the firm are financed through different combination of liabilities i.e. balance sheet tight hands side items. This is generally expressed as the percentage of each capital item used by the debt, preferred stock and common equity of the firm. Hence, a Capital Structure of the company is a mixture of debt, preferred and common stocks and companies' financed overall operations & growth through by means of different funds sources.

Issuance of Bonds and long-term notes payable are part of Debt financing while common, preferred stock and retained earnings are part of equity. Beside this, short-term debt i.e. requirement of working capital is also consider as a part of Capital Structure. Hence, here the total capital components which need to be analyzed are debt capital and capital of equity. As we just stated that debt capital comprises of long term debt like loans from bank and they are much expensive from that of equity and hence also comprises of higher return. As far as equity capital is concern, they comprises of capital that has been contributed by shareholders with higher risk.

In order to justify the recommendation, we have use the data provided in Task 3 Capital structure.

The highest EPS which is the main item looked by the investors is of 50% Preferred and 50% Common Stock as the years are increasing. Like in year 9, the EPS of 20% bond and common stock was highest and 50% Preferred and 50% Common Stock has 0.032 of EPS while in year 10, EPS of the option were 0.043 but in year 11, 50% Preferred and 50% Common Stock has the highest EPS with 0.055, 0.0637 in year 12 and in year 13 EPS was 0.074. Hence, 50% Preferred and 50% Common Stock has an increasing trend which indicates that company will be increasing their cash flows with this options. Moreover, it also increases the confident of the investors, so company consider those option that enhance the investors confident within the company.

Comparing this recommendation with other capital structure option such as 9% bonds EPS was 0.016, 20% - 9% bonds and common stock, EPS of this option EPS was 0.33 while 40% - 9% bonds and common stock EPS was 0.03 and 60% - 9% bonds and common stock ...