FIN501 MoD 4 Case Assin Essay Example | Topics and Well Written Essays - 1250 words

FIN501 MoD 4 Case Assin - Essay Example A financial structure of a company on the other hand includes the short term debts, business creditors and other short term liabilities (Ho and Lee, 2003). Most businesses finance their business through debt or equity or a combination of both. Through debts the companies secure long term bank loans or take bonds which are redeemable after a long period of time. Through equity the companies issue common shares, preferred shares and sometimes the retained earnings injected at the end of the trading period where a profit has been realized. This literature will examine the financial books and ratios of 3 companies and determine their financial structure and the risks they run in choosing that particular mix (Ehrhardt, 2013). The choice of whether to use exclusive debt or equity financing or what mixture depends on the financial position of the business, the credit standing, the tax situation of the country and the nature of the business. This mix will determine what the cost of capital i s (Finnerty, 2013). Equity financing has its own advantages in that there is no burden of debt hanging over the owner’s heads, they therefore do not run the risk of going bankrupt unlike when financed by a debt. The owners too consent to the risk of losing all their investment in case the business fails. The disadvantages of equity financing is that the many the investors the more the control of the business is diluted and so are the profit shares. Debt financing on the other hand is advantageous to the management of the business in that the lenders do not take any control of the business or direct how the money lent will be spent. The lenders also do not share the profit of the company, all they are entitled to is the loan repayment and the interest on loan. But one of the major advantages of debt financing is that it reduces the tax liability of the business because the interest paid on loan is tax deductible. This protects a part of income from taxation and at the same tim e lowering your business’ tax liability. The disadvantages of debt financing involve ruined credit rating and risking bankruptcy (Besley and Brigham, 2008). An optimal capital structure is one that attains a good balance between the returns of the capital structure and the risks that the structure exposes the company to. The optimal capital structure will minimize the risks involved yet maximize the returns and it also increases the valuation of the stock in the stock market at the same time minimizing the cost of capital (Ho and Lee, 2003). eBay This is a multinational company based in America with outlets in more than 30 countries worldwide. It was started in 1995 and deals with providing consumer-to-consumer internet services. Its nature of business involves providing an over the internet market where customers can auction their goods, this was the initial venture. However, with time the company has diversified its services providing online advertisement services through e Bay classifieds, online payment through PayPal and online event ticket trading through StubHub (Gitlin, 2007). Between 2005 and 2009 it had acquired Skype but then sold a majority stake so as to concentrate on the other internet services it was renowned for. Examining the financial statements of the company for the period ended 31st December 2012 the following information was obtained. The company has a total assets value of $37.074 billion