The capital structure decision and the cost of capital Research Paper

The capital structure decision and the cost of capital - Research Paper Example and so a lesser D/E ratio would be recommended for a typical attach to. Therefore, D/E ratio = aggregate liabilities/ shareholders equity A really high D/E ratio would show to the fact that the attach to 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 utilise a lot of debt financing to finance additional note operations, this would result to more generation of revenues and if the revenues best 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 except 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 ope rate computer software operations. (Gibson, 2008 p260) MATTEL Mattel is a premier company for toys. It designs, manufactures as swell up as merchandises toys. The Companys believes that PLAY is vital for the development of Children besides other benefits. These include the development of desire and creativity, good healthy interaction and the construction of strong learning foundation among others. Most of Mattels byplay 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) Mattels 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 worker where they experience peaks during th e 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 culture. though no market genus 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