CAPITAL STRUCTURE

The Capital Structure Decision And The Cost Of Capital

The Capital Structure Decision And The Cost Of Capital

Introduction

Credit ratings and financial performance directly affect the decisions of the capital structure. This paper highlights the appropriate capital structure for the companies included in the analysis. Capital structure is determined on the basis of the nature of operations, market characteristics, product offering, industry structure, and financial performance of the companies. Goodyear Tire & Rubber Co. should go for equity financing (low-debt ratio), Campbell Soup Co., and Hewlett Packard should go for medium debt ratio, with marginalized equity and debt financing structure considering the nature of their business, and market risk.

Company Description

Three companies have been included in the analysis. These include Goodyear Tire & Rubber Co., Campbell Soup Co., and Hewlett Packard. This section presents a brief overview of company characteristics and its business operations.

Goodyear Tire & Rubber Co.

Goodyear Tire & Rubber, commonly known as Goodyear, holds a key position in tire and rubber manufacturing industry. Operations of the company are extended in the domains of manufacturing, development, and sales and distribution of tires and related products worldwide. It markets both automotive and off-road applications tire products (Goodyear, 2011). Goodyear Tire & Rubber manufactures aircraft and motor vehicle tires, inner tubes and tire repair materials. The finished products are sold to aircraft, motor vehicle manufacturers, and tire wholesalers. It also manufactures and process plastic and rubber products, including machinery for: blow molding, calendaring, plastic-compression molding, extruding, injection molding, plastic working, rubber working, tire making, tire recapping and tire shredding (Goodyear, 2011).

Campbell Soup Co.

Campbell Soup Co. is primarily engaged in manufacturing of convenience food items. It manufactures fresh and frozen bakery products, soups and sauces, and beverages. Main raw material for the company include flour, starch, sugar, meat, dried fruit, emulsifiers, flavorings, preservatives, additives, gluten, vitamins, food acids etc (Campbell Co, 2011). It processes them into consumer food products like bread, doughnuts, cakes, pies, pastries, soups, sauces, beverages etc. Company is also engages in marketing and selling of these items to supermarkets, convenience stores, food service providers and other retailers. The end-products are packaged and distributed to grocery wholesalers, supermarkets, specialty food stores, and food service contractors for final consumption. Leading brands of the company include Campbell's, Pepperidge Farm, V-Fusion, V8, Prego, and Swanson (Campbell Co, 2011).

Hewlett Packard

Hewlett-Packard (HP or “the company”) provides technology products, software, solutions and services to a broad range of customers including individuals, small and medium size businesses (SMBs), and large enterprises (HP, 2011). It provides expert advice and assistance in the fields of testing, and supporting software to meet the needs of a particular customer. They also plan and design computer systems and integrate computer hardware, software and communication technologies. HP manufactures and markets computer displays (monitors) and peripherals (e.g. keyboards, mice, printers, scanners etc.), computer systems under different brand names, and networking equipments (e.g. routers and modems).

Analysis of Nature of Business and Capital Decision Making Structure

This section separately discusses the business operations of each company included in ...