EXECUTIVE SUMMARY
Optimum capital structure (OCS) is best known as an avenue where company finances its assets by chosen the right combination of debt, equity or hybrid securities. OCS is a structure that can be classified as a liabilities to company. For better still, it can be known as the ratio of various type securities of the company for long term financing.
Costco Sale is one of the big box retail companies with the capabilities to render value to the customers and employees in North America and the rest of the world. Costco Wholesale has the potential of solid balance sheet, and with the strength of generating cash flow, in order to carry out its operations, i.e. over $900 million was returned to shareholders in the form of
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It has been a serious process for many organizations to raise capital which automatically has business and financial risks involved.
However, two known authors in this field of study believe that companies with low business risk obtains factors of production at a lower cost which may also pave to the ability of the firm to operate more efficiently (Amit & Wernerfet, 1990). Therefore, many stockholders faced a high of uncertainty; this is because some companies do not have the financial strengths to cover its debts that even may result to bankruptcy.
Therefore, it is imminent for organization to make a wise decision so as choose the right combination of debt and equity such as short-term and the long-term liabilities.
The mixture of debt-equity mix is important so as to maximize the stock price of the Costco. However, it will be significant to consider the Weighted Average Cost of Capital (WACC) as well so that it can evaluate the company targeted capital structure. Cost of capital (OC) may be used by the companies as for long term decision making, so industries that faced to take the important of Cost of capital seriously may not make the right choice by choosing the right project(Gitman’s, ).
OPTIMAL CAPITAL STRUCTURE (OCS)
Nevertheless, the use of the Optimal Capital Structure (OCS) is the right techniques to be used in order to acquire the right combination of debt and equity that can maximize the
Finding the perfect capital structure in terms of risk and reward can ensure a company meets shareholder expectations and protects a firm in times of recession. Capital structure refers to how a business puts its money to “work”. The two forms of capital structure are equity capital and debt capital. Both have their benefits and limitations. Striking that perfect balance between the two can mean the difference between thriving versus trying to survive.
I like the way they sell merchandise in bulk at an affordable price. From a consumer’s standpoint, it is easy to overlook what goes on behind the scenes down to how the company is run. Yes, Costco is very popular, but I’ve learned there are many risk factors that come into play when running a Fortune 500 company. A few risk factors include: Costco is highly dependent on the financial performance of U.S. and Canada. If membership loyalty starts to decline mainly in North America, then it can greatly hinder the success of the company. Since Costco sells discounted products on 4,000 products daily, the chances of selling an unsafe product can result in illness or injury that could harm their
The key risks that the company faces are economic conditions, competition, key employees, suppliers, availability of credit, financial risks, business continuity, revenue dependence, cost saving, leased property portfolio, as well as, some other minor risks. The amount of risks faced by the company is high, and the realization of those risks is a good possibility in light of the performance of the company.
In choosing a form of business organization for a new enterprise, important factors include the ability to raise capital.
Costco Wholesale is an American based warehouse membership club which provides wide varieties of products and services to its consumers. The organization was founded around 40 years ago on July 12, 1976, under the name Price Club in San Diageo at California, USA. The firm was founded by two Americans, James Sinegal, and Jeffrey Brotman. The company is engaged in the operation of membership warehouses in the United States (U.S.) and Puerto Rico, Canada, the United Kingdom, Mexico, Japan, Australia, and through majority-owned subsidiaries in Taiwan and Korea.
The store layout is set for customers to want to spend more money. When a customer enters Costco, their eyes are directly facing the televisions, computers, and electronics. Next is expensive handbag, clothes and accessories. As the customer continues through the store, the customer will see home and seasonal items. The near back of the store has all the groceries. The very last thing is the paper products like toilet paper. The locations of items are especially important. Like the necessary things like toilet paper and paper towels makes the customers pass many impulse buys. The type of control is continuous because the layouts are guaranteed in every store. The layout allows the company to control its rotation of stock and to make adjustments once and not have to change it each individual
Healthcare organizations have a way of handling the issues of the capital structure. The policy of the optimal capital structure in a health institute ensures that the financial strength of the company is obtained. Health organizations need to fund their projects for the sake of smooth running of the activities. However, some of them cannot be able to sell stocks to the public since they are non-profit organizations. Capital structure is a dynamic aspect; instead of static. It depends on the socio-economic sector and the conditions the company is operating in. there are three first types of approaches an organization can take when it comes to the optimal capital structure. It has to do with the balancing between equity and debt.
Optimal Funding Terms: - An organization's proportion of short and long haul obligation ought to additionally be considered when analyzing its capital structure. Capital structure is regularly alluded to as a company's obligation to-value proportion, which gives understanding
Costco uses a range of suppliers and buys in large quantities in order to achieve its goal of keeping costs down. It negotiates prices and drives a “hard bargain” so that low wholesale prices can be achieved. “Costco warehouses carry about 4,000 SKUs (stock keeping units) compared to the 30,000 found at most supermarkets. By carefully choosing products based on quality, price, brand, and features, the company can offer the best value to members” (Costco:
The highly levered capital structure had a significant effect on the findings of sections B and C. First of all, the ranges which resulted from the new calculation of the break points caused the weighted average cost of capital (WACC) at all range levels to drop. The WACC is calculated by multiplying the weights of the capital structure by the costs of
Secondly, Barclay and Smith noted that the theories of optimal capital structure are not mutually exclusive. Thirdly, he noted that many of the variables that we think affect optimal capital structure are difficult to measure. The literature on the financing decisions of firms in developed economies, the consequent capital structures formed and the effect of these capital structures on the performance of these firms has been quite extensive. In stark contrast, however, to the voluminous nature of this literature in developed economies, there is a relative paucity of studies investigating the same in developing countries. Robinson (2003) pointed out that as developing countries move to liberalise their economies, and large private corporations seek to become leading actors in this industrialization and economic development, the relationship between corporate organization, corporate financing patterns, capital structure and economic and industrial development become issues that required more attention at the academic, organizational and public policy levels.Robinson further noted that a number of pertinent questions still arise. On such question is whether the financing patterns or capital structures of developing country corporations similar to those of firms in developed countries, either currently or at an earlier stage of development of the latter. Secondly, one may want to find out if there are structures and patterns of corporate finance which are
This report tries to visualize “OPTIMAL CAPITAL STRUCTURE” and represent the facts that include features of capital structure, determinants of capital structure, and patterns of capital structure, types and theories of capital structure, theory of optimal capital structure, risk associated with capital structure, external assessment of capital structure and some assumption related to capital structure.
To put it simple way, first we have to understand optimal capital structure is maximizes a firm’s stock price, and the target capital structure is mix of the debt, preferred stock, and common equity the firm wants to have (Eugene and Joel 2009). The capital structure is also showing how a firm use different sources of funds to finances its overall operations and growth the stock price.
If the firms funding requirements are larger than their retained earnings, they must issue debt as this is preferred to issuing equity. Based on this theory, a firm’s financing policies could be viewed as signalling management’s view of the firm’s stock value (Wang & Lin 2010).Myers and Majluf (1984) also add that if firms issued no new securities but only used its retained earning to support the investment opportunities, the information asymmetric could be resolved. This suggests that issuing equity turn out to be more expensive as asymmetric information insiders and outsiders increase. Large firms should then issue debt to avoid selling under priced securities. As the requirement for external financing increases, businesses will work down the pecking order, from safe to riskier debt, perhaps to convertible securities or preferred stock, and finally to equity as a last resort. Each firm's debt ratio therefore reflects its cumulative requirement for external financing (Myers 2001).The pecking order theory clarifies why the bulk of external financing comes from debt. It also describes why organizations that are more profitable borrow less: since their goal debt ratio is, low-in the pecking order they do not have a goal since profitable firms have more internal financing available.
Capital structure is defined as the mix of the long-term sources of funds that a firm use. It is composed of equity, debt securities and affect long-term financing of the entity. It is made up by shareholder’s funds, long-term debt and preference share capital. The capital structure mostly focus on the proportions of debt and equity displayed in the company financial statements, especially in the balance sheet (Myers, 2001). The value of a firm can be calculated by the sum of the value of its firm’s debt and equity.