Capital Structure the Optimal Capital Structure Depends Essay

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Capital Structure

The optimal capital structure depends on a number of factors. The nature of the business that the company is in is important, in particular the fluctuations in the company's cash flows. The company should also consider the time frame for which the capital is being used. In addition, the optimal capital structure also depends on the degree to which the company is willing to cede control, and the cost of capital that it desires (Kennon, 2011). Thus, for every different firm there will be a different optimal capital structure.

Mattel is in a stable business, its revenues ranging between $5.4 and $5.9 billion in each of the past five years and its net income fluctuating between $379 million and $684 million during that same period (MSN Moneycentral, 2011, 1). This high level of predictability in the firm's business means that it can handle a high degree of leverage. The financing cost of debt is lower than the cost of equity, which is appealing to a company like Mattel.

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Its projects are likely to be short-term in nature because Mattel is not oriented towards the type of long-term growth model that would encourage the use of equity as a means of financing its business. Mattel's current capital structure is 49.5% debt and 50.5% equity, oriented probably more to equity than it needs to be, but it has remained stable at this structure for the past three years.

Clorox is in a similar position to Mattel. Its business is mature and its revenues are relatively stable, although there is a little more growth in Clorox's revenues. The company's net income shows stability in profits as well (MSN Moneycentral, 2011, 2). For a mature company with little growth, Clorox can orient itself towards debt in order to lower its cost of capital. Something in the range of 60% debt would be appropriate. Clorox's current capital structure is discouraging -- the company has negative equity. There is no need for a company.....

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