Alternative Capital Structure Paper
Kristopher Watkins
FIN/419
November 23, 2015
James Hagist
















Alternative Capital Structure Paper
Land Recovery has decided to investigate several forms of financing assets to find an alternative capital structure. It is going to implement debt financing in order to raise its capital and has laid out three different options to consider for the new policy. Important aspects of this policy include current ratio, net working capital position, and expected rate of return on stockholders\' equity, which you will find within the spreadsheet included at the bottom of this paper. We know for each option there will be certain variables that do not change. Each option includes current assets of 30 million and fixed assets of 35 million, which total 65 million in assets. We also have a tax rate of 40% and EBIT of 6 million. Stockholder’s equity has provided us with 40 million in assets, as well. Debt for each option is 25 million, though the difference of long term and short term debt changes for each option. Now we will break down the differences of each of those options.
Option 1
Provided with option 1 is a short term debt of 24 million and a long term debt of 1 million. Option 1 has the lowest interest expense at 1.405 million. Although, it shows this option will pay the highest amount of taxes at 1.838 million reducing earnings from 4.595 million to 2.757 million. This option provides the highest rate of return on stockholder’s equity at 6.89%. This option has the lowest net working capital of 6 million, as well as the lowest current ratio at 1.25:1. Because of the low current ratio and net working capital I would consider this option to be the highest in risk and profitability.
Option 2
Provided with option 2 is a short term debt of 18 million and a long term debt of 7 million. Option 2 has a medium interest expense at 1.460 million. It shows this option will pay a medium amount of taxes, as well, at 1.816 million reducing earnings from 4.540 million to 2.724 million. This option provides a medium rate of return on stockholder’s equity at 6.81%. This option also has an increased net working capital of 12 million, as well as a medium current ratio at 1.66666666666667:1. Because of the medium current ratio and net working capital I would consider this option to fall within the medium range of risk and profitability.
Option 3
Provided with option 3 is a short term debt of 12 million and a long term debt of 13 million. Option 3 has the highest interest expense at 1.515 million. It shows this option will pay the lowest amount of taxes at 1.794 million reducing earnings from 4.485 million to 2.691 million. This option provides the lowest rate of return on stockholder’s equity at 6.81%. This option has an even more increased net working capital of 18 million, as well as the highest current ratio at 2.5:1. Due to the highest current ration and net working capital of the 3 options I would declare this option the lowest in risk and profitability.
Which Option is Best?
Of the three options provided each has given us a slightly different alternative to decide upon the best possible capital structure. Although option 1 has the lowest interest expense, as well as the highest ROE, its net working capital and current ratio is significantly lower than the other two options. For these reasons I would choose not to go with this option, as having such a low net working capital and current ratio could cause the company problems with creditability towards their investors. Option 2 provides a rather level medium between the two options, though I would be particularly more attracted to option 3. The main reasons for this would be because of the high current ratio and significantly higher net working capital, which goes from 6 million in option 1 to 18 million in option 3. Although we would be slightly reducing our ROE the significant increase of net working capital and current ratio will allow better protection for the company’s investments.
Conclusion
Overall, this decision could be made solely based upon the opinions of the management in charge of making these decisions. Even though option 3 seems like