CAPITAL STRUCTURE

The Capital Structure Decision and the Cost of Capital

The Capital Structure Decision and the Cost of Capital

Introduction

DreamWorks Animations SKG, Inc was founded and formed by a trio of entertainment players on 12th October, 1994 DreamWorks Animations SKG, Inc is based in Glendale, California. It is an American studio for animation that creates television programs, films and online virtual worlds that have animated features (Grant, 2008).

The capital structure of a business can be defined as the sum of the funds from their own contributions and those acquired through long-term debt, while the financial structure corresponds to the total debt-current and noncurrent-coupled to internal equity or liability. The acquisition of funding sources, along with the kind of assets held; determine the greater or lesser degree of solvency and financial stability of the economic entity. The relative magnitude of each of these components is also important to assess the financial position at any given time. Capital structure reflects the ratio of debt and equity capital raised to finance long-term development of the company. On how the structure is optimized, depends on the success implementation of the financial strategy of the company as a whole. In turn, the optimal ratio of debt and equity capital depends on their value (Martin & Baker, 2011).

In economic terms, the cost of capital is an alternative rate of return, which is available on the stock market by investing in securities of similar risk and maturity considered object of investment. There are several approaches to determining the cost of equity capital. The most commonly used in practice three models: the model estimates long-term assets (Capital Asset Pricing Model, CAPM), the cumulative model building and model of the multiplier (Pratt & Grabowski, 2010).

Calculations

DreamWorks Animations SKG, Inc

Debt Ratio

Debt Ratio = Total Liabilities / (Total Liabilities + Total Equity)

Debt Ratio = 640,094 / (640,094 + 1,258,871)

Debt Ratio = 640,094 / 1,898,965

Debt Ratio = 0.3370

Debt to Equity Ratios

Total Liabilities / Total Equity = 640,094 / 1,258,871 = 0.5084

Short-term Liabilities / Total Equity = 616,751 / 1,258,871 = 0.4899

Long-term Liabilities / Total Equity = 23,343 / 1,258,871 = 0.0185

Disney (Walt) Company

Debt Ratio

Debt Ratio = Total Liabilities / (Total Liabilities + Total Equity)

Debt Ratio = 23,480,000 / (23,480,000 + 39,342,000)

Debt Ratio = 23,480,000 / 62,822,000

Debt Ratio = 0.3737

Debt to Equity Ratios

Total Liabilities / Total Equity = 23,480,000 / 39,342,000 = 0.5968

Short-term Liabilities / Total Equity = 11,000,000/ 39,342,000 = 0.2795

Long-term Liabilities / Total Equity = ...