The capital structure decision and the cost of capital Research Paper

The capital structure decision and the cost of capital - Research Paper Example Thus a lesser D/E ratio would be recommended for a typical company. Therefore, D/E ratio = aggregate liabilities/ shareholders’ equity A very high D/E ratio would translate to the fact that the company has been applying debt in its growth to a high extent. The resultant impact is a scenario of very volatile earnings by the company due to the marginal interest expense. If a company applied a lot of debt financing to finance additional business operations, this would result to more generation of revenues and if the revenues outdo the costs, then the shareholders would be left better of since they would earn more dividends. But it is essential to note that this is if, and only if, the earnings surpass the cost of debt. D/E ratios may also vary depending upon the industry the company is operating. For instance, a company that is highly capital intensive would have a higher D/E ratio than those who operate computer software operations. (Gibson, 2008 p260) MATTEL Mattel is a premier company for toys. It designs, manufactures as well as markets toys. The Company’s believes that PLAY is vital for the development of Children besides other benefits. These include the development of imagination and creativity, good healthy interaction and the construction of strong learning foundation among others. Most of Mattel’s business is done online. ... They say their business is global and thus, internationalized and have subsidiaries besides the parent company which is registered in the US. (mattel.com, 2011) Mattel’s gross sales are formed up as follows: 30% in Latin America, 52% in Europe, 11% in Asia Pacific and 7% in others areas. They manufacture toy products themselves as well as outsourcing from other companies. Their main manufacturing facilities are set up in Indonesia, China, Malaysia, Thailand and Mexico. Their business is also seasonal where they experience peaks during the traditionally set holiday seasons. In fact the biggest sale revenues are experienced in the 3rd and 4th quarters of their fiscal year. The risks facing Mattel are only based on non-satisfaction of clients since its business depends almost entirely on Toy business. Shifts in demand would, therefore, impact adversely on their business. Seasonality as mentioned earlier is also another risk as well as inaccurate anticipation of the trends and cul ture. Though no market beta is given on this website, it is stated in their 2010 financial reports that the business is highly dependent on market behavior, where it faces to a large extent both foreign and local market rates of interest variances that form up market financial risk. (files.shareholder.com, 2011) Mattel Company had a market beta of 1.0 as reported by smartmoney.com website as of 2011. (smartmoney.com, 2011) Due to the high levels of financial risks that Mattel as a company faces and its doing business world wide, usage of debt as a source of capital would have a very huge impact on the capitalization of the company. Therefore, the recommendation is