“The capital structure is how a firm finances its overall operations and growth by using different sources of funds…When people refer to capital structure they are most likely referring to a firm's debt-to-equity ratio, which provides insight into how risky a company is” (Capital Structure). After evaluating the changes in different capital structures for years nine through thirteen, it is obvious that the best capital structure overall is 50% Preferred and 50% Common Stock. This choice optimizes the returns for shareholders overall. The only option that comes closest is 20% 9% Bonds and Common Stock. The first year, the 20% option yields a higher return on Earnings per Common Stock share. The second year, the two options yield the same return. After this, however, the 50% option yields .001% more the third year, .002% more the fourth year, and .003% more the fifth year. According to this trend, this option will exceed all other capital structure options by a fairly large sum in future years. The other options are not advisable because while all options do show growth, none show more Earnings per Common Stock share than the 50% option shows. This is also the option that shows the most even split between investments. All other capital structures have uneven splits between investments, which may prove a weakness should the larger of the two investors fail. For example, in the 20% option that was the secondary choice, the alternative capital sources were split 120,000 in bonds and 480,000 in common stock. What if that common stock should fail for any reason-then the company is only left with the 120,000 in bonds. The 50% option is split equally between preferred and common stock, which seems more stable and sensible to me.
In capital budgeting, “businesses should pursue all projects and opportunities that enhance shareholder value…however, management needs to use capital budgeting techniques to determine which projects will...