The capital structure decision and the cost of capital Research Paper - 1

The capital structure decision and the cost of capital - Research Paper Example Answer 1. Referring the balance sheet as on 5/1/2011, Source: http://finance.yahoo.com/q/bs?s=NVDA+Balance+Sheet&annual (In thousands of US dollar) Total liabilities = 1,313,784 Short term liabilities = 942,682Â   Long term liabilities = 23,389 Total Equity = 3,181,462 Market capitalization = 10.92 Billion Hence debt ratio, total liability/ (total liability + total equity) =1,313,784/ (1,313,784+3,181,462) = 29.2% Debt to equity ratio, total liabilities/total equity = 1,313,784/ 3,181,462 = 41.29% Again, debt ratio based on short term liabilities 942,682Â  / 942,682Â  + 3,181,462 = 22.85% Again, debt ratio based on long term liabilities 23,389/ 23,389 + 3,181,462 = 0.72% Debt to equity ratio based on short term liabilities 942,682/ 3,181,462 = 29.6% Debt to equity ratio based on long term liabilities 23,389/ 3,181,462 = 0.735% Answer 2 Debt to equity ratio shows how well creditors are protected. From the calculated ratios, following inferences can be made. Debt/equity ratio based on long term liability is quite low and the company Nvidia is going quite safe so far long term liability is concerned. It can also be gauged from this ratio that the company is quite conservative in exploiting the long term debt for the growth of the company. Debt/equity ratio based on short term liability is within the limits of healthy company. ... ket conditions but as market conditions improve and the company is in a position to enter new growth trajectories, the Nvidia should use more debt to finance its expansion needs instead of equity. That will help company to enhance its equity valuation in the market. Answer 3. Two companies chosen are Intel and AMD, which are also competitors to Nvidia in certain product range. A. Intel Corporation Referring, http://finance.yahoo.com/q/bs?s=INTC+Balance+Sheet&annual (as on 25 Dec, 2010) (All numbers in thousands) Total liabilities = 13,756,000 Short term liabilities = 9,327,000 Long term liabilities = 4,929,000 (calculated by difference from total and short term liabilities) Total Equity = 49,430,000 Market capitalization = 119.30 Billion (as on 5/27/2011) Hence debt ratio, total liability/ (total liability + total equity) = 13,756,000/ (13,756,000+49,430,000) = 21.77% Debt to equity ratio, total liabilities/total equity = 13,756,000/49,430,000 = 27.82% B. AMD Referring, http://financ e.yahoo.com/q/bs?s=AMD+Balance+Sheet&annual (as on 25 Dec, 2010) (All numbers in thousands) Total liabilities = 3,951,000 Short term liabilities = 1,674,000 Long term liabilities = 2,277,000 (calculated by difference from total and short term liabilities) Total Equity = 1,013,000 Market capitalization = 5.83 Billion (as on 5/27/2011) Hence debt ratio, total liability/ (total liability + total equity) = 3,951,000/ (3,951,000+1,013,000) = 79.6% Debt to equity ratio, total liabilities/total equity = 3,951,000/1,013,000 = 390% Summing up, the debt-equity ratio of all the three companies are found to be as per the following. Nvidia – 29.60% Intel – 27.82% AMD – 390% It is seen that debt-equity ratio of Intel and Nvidia are more or less in the same range but AMD is operating on very high