Capital structure and payout policy - Term Paper Example

Introduction Background Starbucks Corporation is an international company that deals with coffee products, with its headquarters based in Seattle Washington, America. During its commencement in 1971, the company was a retailer and a local coffee roaster; but it has since stretched out swiftly. It has Italian-style coffeehouse chain and it is the world’s largest coffeehouse company, with presence in more than 60 countries and more than 20,000 stores (Starbucks Corporation 2011 3). It deals with coffee beans, salads, hot and cold drinks, hot and cold sandwiches, snacks, mugs and tumblers, and sweet pastries.

In addition, Starbucks distributes some of its brand through grocery stores, including coffee and ice cream. Its other products include markets films, music, and books through the Hear Music and the Starbucks Entertainment division. Scores of the company’s products are either location specific or seasonal. Starbuck’s most remarkable expansion, when it used to open new stores days on end, was in the 1990s till 2000s. The company started establishing oversees stores in 1990s; and currently, roughly third of its stores are oversees (Starbucks 2).

Identification of problem Starbucks mainly obtain its capital from equity and debt sources. However, the company must struggle to strike a good balance between equity and debt; because, if it uses too much debt, then it may be obligated to pay too much interest and subject it to the risk of bankruptcy. Furthermore, such a scenario could limit its payout capability, hence keeping away investors, which again limits its shareholding capability. Therefore, it is important to analyze the company’s capital structure, as it plays a crucial role in regards to its dividend payout, risk of bankruptcy among other issues.

Analysis of issues Capital structure means the manner in which a particular company combines its sources of capital, which are used to finance its long-term assets, including debt and equity. Gearing or leverages is used to measure the proportion of the company’s debt capital. However, the company’s capital structure is affected by a number of factors, and the optimal financing mix should be its target. Difficulty, however, arises, in trying to establish the exact optimal capital structure, since this process is not a science.

In order for Starbuck to establish its optimal capital structure, it has to give consideration to all the factors that are believed to play some crucial role in establishing an optimal mix. In addition, it is important to consider the fact that a trade-off between return and risk has a strong impact on the capital structure. In other words, this means that excessive debt will increase the company’s earnings risk, though this will lead to higher potential returns. Furthermore, if the company maintains high debt capital, the stock price will decline due to the higher risk related to high level of debts.

On the other hand, the stock becomes more attractive to the investors, if it has a high potential of returns, which will again send the stock’s prices upwards. As such, the optimal capital structure for Starbuck is the one that establishes a balance between return and risk, hence helping attain its overall goal of maximizing the prices of its stock. It is, therefore, very crucial for the management of Starbuck to ensure it maintains the lowest cost of capital and at the same time maximizes the shareholder’s wealth.

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