Capital Structure
A company's capital structure is the balance of different methods of financing that provides funding for the company's operations. The basic breakdown is between debt and equity, but preferred shares may also factor into the capital structure. Debt includes all forms of liabilities, including both long-term debt and current liabilities. Equity includes both the book value of shares issued and the company's retained earnings. The market value of the shares is not relevant in calculating the firm's capital structure. Analyzing the capital structure of the company is done by first calculating the capital structure. Because debt and equity have different risk characteristics, the ideal capital structure of the company must be evaluated against the type of business model that it has. Different risk profiles (capital structure) are considered ideal for different types of companies. This report will analyze the capital structures of three companies -- Goodyear (NYSE: GT), Campbell Soup (NYSE: CPB) and Hewlett-Packard (NYSE: HPQ) and provide conclusions with respect to the fit of each company's capital structure in relation to its theoretical ideal capital structure.
Goodyear Rubber and Tire Co.
The current capital structure for Goodyear is 91.6% debt and 8.4% equity (MSN Moneycentral, 2011). The company has maintained a similar capital structure for the past several years. As recently as 2006, Goodyear had negative equity, so it has a long history of being highly leveraged. Leverage increases the risk associated with owning the company's equity, since a large portion of the firm's free cash flow must be dedicated to debt service, which typically has priority over disbursement to shareholders. This also reduces the amount of money that the company can put towards expansion. This can place limits on growth and on the ability of the company to pursue competitive opportunities that might arise.
Goodyear's business is mature. The company operates in the consumer...
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