The Capital Structure Decision and the Cost of Capital - Essay Example

The products include dolls and accessories, vehicles, games, puzzles, as well as play sets. The company’s popular toy brands include the Barbie dolls, Polly Pocket, Little Mommy, Monster High, BabyGear, WWW Wrestling figures, Fisher-Price, CARS, Toy Story, Max Steel, and Batman. The company sells it toy products in physical stores as well as online stores. Based on the module discussions discussed, the nature of the Mattel (http://finance.yahoo.com/q/bs?s=MAT+Balance+Sheet&annual) company’s toy business operations and its toy clients, it is highly recommended that the capital structure (total liabilities or debt and equity proportions) must be adjusted to the medium debt ratio (1.0) type of business structure.

The medium debt type of business organization can be equated to a financial position where there is an equal amount of total debt and total l equity. For, increasing the debt to an amount which is higher than the total equity would entail an increase in interest payments to the creditors. Creditors lend money in exchange for interest payments. In terms of amount, the current Mattel debt and equity amounts are high debt for both debt and equity amounts do not reach $3,000,000,000. Thus the medium debt ratio (1.0) amount can be reached my making either the debt equate the equity amount or the equity amount to equate the debt amount.

Mattel Company has the best debt to equity ratio at 1.0. In terms of cost of capital, Mattel has the lowest of the three companies. On the other hand, an increase in the stockholders’ equity amount would generate more cash on hand needed for the company’s continuance of its current operations. However, the stockholders may not have enough funds to increase their investments in the company. In terms of risks, borrowing funds will increase the amount of the unpaid liability. Likewise, borrowing funds will generate the risk that creditors may not be able to grant the required loan amount.

In terms of risks, the company will not be able to generate enough revenues to pay for the loan amount. One advantage of the generation of funds through debts is to avoid increasing the balance sheet’s stockholders’ equity figure. An increase in stockholders’ equity would produce lesser dividend distribution per share of stock. An advantage of the increasing debt amount is the avoidance of decreasing the company’s dividend per share contribution. The company’s 2010 beta is $0.99 each.

Clorox The Clorox Company (http://finance.yahoo.com/q/ks?s=CLX+Key+Statistics) is engaged in the manufacture and sale of consumer products. The products are sold in the United States and around the world. The company’s products are segregated into four major divisions. The divisions are cleaning, household, lifestyle, and international. The company’s popular brands include Clorox cleaning products, liquid – Plumr, S.O.S., STP, and Armor All. Internationally, the company focuses on the home care products, cat litter products, plastic bags, containers, wraps, and charcoal products.

The company’s beta is 0.35. In terms of amount, the current Clorox debt amount is less than $5,500,000,000 and the company’s equity amount is less than $100,000,000. Thus medium debt ratio (1.0) amount can be achieved by either increasing the current equity amount to equal the debt amount or reducing the debt amount to equal the current equit