Competition Bikes is considering expanding to Canada and possibly acquiring Canadian Biking Inc. or merging with the company. Competition Bikes needs to make sure that the demand is high in Canada for the products being sold. Competition Bikes needs to ensure that Canadian Biking is financially stable and has future potential for growth without risking bankruptcy. Competition Bikes would also need to research capital structure, working capital and capital budget to determine if there is possibility in profitability of expanding, or merging with Canadian Biking or even acquiring the Canadian company.
A1. Capital Structure
“Is a mix of a company's long-term debt, specific short-term debt, common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds (Investopedia, 2015).” Competitions Bikes equity is considered common or preferred stocks, and its debt is considered long term loans and bonds. If Competition Bikes is looking to expand it has to ensure that they have the proper capital structure allowing the company to maximize return on investment, maximize cash flow, and be able to pay of accrued debts. Competition Bikes should consider five options of capital structure that will allow that company to produce the highest earnings per share, ensuring that shareholders will continue to invest and be satisfied with the outcome. Supporting a reliable net income will allow the company to keep the interest of shareholders. Earnings per share will used to monitor the capital structure of the company, this method will allow the company to show its financial decisions and how they can impact stockholders and shareholders. That’s why it is important to have strong earnings per share to keep shareholders interested in continuing investing in Competition Bikes. If shareholders are happy and seeing profits made on their shares they will most likely keep investing in the company. Another aspect the Competition Bikes needs to consider is the inherent risks associated with capital structure.
The first option for capital structure is the consideration of using bonds which are fixed at a 9% interest. Although using bonds can be a risky avenue of approach due to having to pay the full amount loaned by a specific date. If the company is facing financial struggles it will still have to make it’s payments on the bonds loaned. Having fixed interest rates on the bonds is not always good due to interest rates being high and the company generally pays out its interest semi-annually, which can affect the company’s income. The benefits of using bonds are that companies can use them as a tax deductible. This would be a benefit for smaller companies that would rather not use equity and find it easier to manage the payments over the year. What Competition Bikes needs to consider is that they want to expand with a company that is already in the market and not wanting to start a new company in the market. With the new expansion Competition Bikes will not guarantee that their profits will increase exponentially in the future. With this option Competition Bikes will be creating more debt to fund the expansion and may be potentially using its new source of income to pay its debt and not being able to use its additional source of income to their likings. If Competition Bikes does decide to use this capital structure option it will break down as follows:
Shareholders will be experiencing a total of 0.226 earnings per share over a 5 year period. This calculation was utilized using earnings before interest & tax (EBIT), (Investopedia, 2015). Even though the earnings per share show potential Competition Bikes has several other options it can utilize that have less risk and higher earnings per share.
The second option for capital structure is that Competition Bikes uses stocks to