Competition Bikes, Inc. - Task 3

Competition Bikes, Inc. - Task 3

Capital Structure & Recommendation

If shareholder return is to be maximized, then the Competition Bikes, Inc. needs to go for 50 percent of the common stock and 50 percent of the preferred stock. This approach is recommended as it will strengthen the financial position of the company; by dividing the total capital structure equally among the common as well as the preferred shares, the company will result in increasing shareholder's value. Although an existing capital structure will maximize the value of shareholders, it would also lead towards enhancing the value of overall company. In addition to this, it is essential for the Competition Bikes, Inc. to keep concentration on the quality of their merchandise as well as services, if they to gain competitive edge in the marketplace.

Mainly, a capital structure is the way in which the company has financed its assets through various combinations of liabilities (i.e. right hand part objects of balance sheet). It is normally articulated as each item's percentage utilized by the liability, common equity, and preferred shares of the company. Thus, corporation's composition of a capital is a combination of its debt, common, and preferred shares as well as firm's financed on the whole areas & development through ways of different sources of funds.

Debt financing include the issuance of bonds and long term notes payable, whereas equity includes retained earnings, preferred stock as well as common stock. In addition to this, short term debt, that is, requirement of working capital is also consider as a part of assets structuring. Thus, in this scenerio the entire elements of resources that are needed to analyze are equity capital as well as debt capital. As it is mentioned that debt funds consist of long term liabilities such as loans from depository, however, they are costly in comparison with equity of a company, and that is why it also consist of higher earnings. Whereas, equity resources comprise of assets that has been contributed by shareholders with higher risk.

In order to justify the provided recommendations, data given in the Task 3 Capital Structure is utilized as follows:

Earnings Per Share (EPS) is the major object for the investors, which comprises of 50% common stock and 50% preferred stock with the growing years. For example, in year 9, the earnings per share of 20% bond and common share was highest and 50% preferred and 50% common share has 0.032 of earnings per share, however in year 10, earnings per share of the alternative is 0.043, whereas in year 11, 50 percent preferred and 50 percent common share associates the maximum earnings per share i.e. 0.055, in year 12 is 0.0637 and 0.074 in year 13. Thus, 50 percent preferred and 50 percent common share represents a rising movement that suggests the earnings of the Competition Bikes, Inc. will increase in future with this options. Furthermore, it will also result in increased confidence of stockholders; therefore company must consider this option as ...