Capital Structure Paper






Capital Structure Paper

FIN/419
May 25, 2015
Maria Johnson


Capital Structure Paper
A company’s capital structure is one of the most important aspects of a successful and functioning business. When analyzing a capital structure, the short term and long term debts should be evaluated thoroughly. The level of debts-to-equity ratio should be balanced; not too high and not too low, as being in any one of these ranges could be viewed negatively. Evaluate how a change in the long term debt of a company will affect their company’s operating result. This paper will discuss the different effects of an increase in the long term debt of a capital structure and how those effects will impact the corporations leverage. Recommendations on the optimal capital structure to maximize shareholder wealth.
Ten Percent Long Term Debt Increase
As of September 27th, 2015, Apple Inc.’s long term debt was resting at exactly $28,987,000. A ten percent increase in the long term debt of Apple Inc. would have a relatively small impact across the board for the company. At 28.99 million, a ten percent increase in the long term debt raises things up to 31.89 million. These numbers are very close together, and it is safe to say that a lot of things within the company would not be altered by very much due to this change in long term debt. The multi-billion dollar corporation does not need to put much thought towards numbers as small as a million or two. Much unlike some other companies and business struggling to reach a point of success that could even be considered half as good as Apple’s current place. It is important for everyone to remember that the status Apple has managed to attain did not come to them without a large and difficult amount of hard work, innovative ideas, quality goods being manufactured by the corporation for sale to the masses, and possibly most importantly a sound long term financial plan.
Apple Inc. is a company that is making enough money on a regular basis that such an increase could potentially be looked over in favor of more pressing concerns that will have a larger impact on its financial status. But then again, such could be expected from the electronic titan with a look back at its history in terms of finances and debt. According to Pressman (1993) “Apple Computer Inc.'s first long-term debt offering, expected later this summer, received a preliminary A rating from Standard & Poor's and a prospective A2 rating from Moody's Investors Service last week. The Cupertino, Calif.-based computer maker, which has issued commercial paper in the past, filed a registration statement with the Securities and Exchange Commission earlier this month to sell as much as $500 million of long-term debt securities".
The two credit agencies said they based their ratings on the company's conservative capital structure and its ranking as the second largest seller of computers. The company's profit margins have been shrinking for several years, but sales have steadily increased since Apple implemented a low- cost, high-volume strategy, the credit analysts said” (p. 3). With these numbers so far behind the company; over twenty years ago, it is fairly easy to see how they could be doing as well as they are in the market today.
Change in Capital Structure
A ten percent increase in long term debt at the same current cost of debt increases the operating leverage as long as the company is making regular fixed interest payments on that debt. Operating leverage only includes fixed expenses in the production of a product. According to marketwatch.com (5/2015), Apple increased its total sales revenue from $170.87 billion to $182.35 billion or 6.72 percent from 2013 to 2014. Apple submitted Form 10-K to the SEC in 2014, and it listed the Total operating expense as $18.03 billion. Apple (9/2014) also provided its 2014 effective tax rate as 26.1% and its interest expense as $384 million.
With this information, we can calculate Apple’s EBIT for 2014 which is sales revenue minus operating expense. This figure comes to 164.32b which is important because if the long term debt increases by 10 percent then it effectively decreases the total amount of revenue. The Form 10-K submitted (9/2015) also states Long-term debt as $28.99 million. If this were to increase by