Columbia Capital Structure

Some other danger factors acknowledge substantial cyclical fluctuation, the effects of unseasonable weather conditions, and the popularity of the out-of-door activities. In order to minimize the negative impacts on this business sector, the smart set started a series Of strategic initiatives, such as product innovation program, newfound multi-channel and multi-country direct-to-consumer platform, information management and their enhanced marketing efforts. All those improvement and cap punishment involve signifi preemptt investment in SO&A expenses and its bushel cost.Thus it is essential to look back and evaluate their current ceiling expression and payout policies to exam whether the social club would start on carrying debt or whether they provoke counterpoise cash return to their investors. Despite capital of South Carolinans regular divid overthrow payouts and stock repurchases, they does non declare a healthy cash and short-term investment balance. According to t he pecuniary data provided in Annual Report, the major financing needs include capital expenditures, working capital expenses, stock buybacks, and dividend payouts. In 201 1 , capital of South Carolina spent $78 one thousand million in capital expenditure and $92. one thousand thousand in working capital investments which was increased from $29 million and $78. 9 million from last social class. Even though the companys net income increases over time, they subscribe generated negative free cash flow for both fiscal year of 2011 and 2010 with around $14. 6 million and $53 million respectively. Currently, the company gross revenue short-term investments to finance those capital expenditures which should not be a great term strategy as the company only has $2. 9 million short-term investments sitting on the balance sheet at the end of 2011.If the company maintains its positiveness and its capital grammatical construction as the end of fiscal year 2010, Columbia will have signific ant monetary difficulties to roleplay capital expenditure requirement and will have emitted resources for distribution to investors in the form of a cash dividend and stock repurchases with current payout rate. In conclusion, Columbia may need to seek additional funding. Even though, historically the company have limited their reliance on debt to finance their working capital, capital expenditures and investing activity requirements.We suggest that the company need to revise their capital structure policy by increasing debt to finance the business activities. Debt not only can provide coverage for any general cost and unforeseen expenses, it also serves as a tax shield allowing more capital to be available to investors. The assumption here is that the company can earn more in tax savings from borrowed funds than it pays in interest expenses and fees on these funds. As shown in Exhibit X, Columbians WAC hit a minimum of 6. 6% at 30% debt proportion, or debt to equity ratio of 0. 3 . As the graph illustrates below, less than 30% debt or debt beyond 40% cause WAC to increase. Also, the PEPS and ROE increase compared to the current 100% equity model. In a business, debt is a two-edged sword. Aggressive use of leverage increases the amount of financial resources available for growth, expansion, and payout for investors. But if Columbia adopts a juicyly leveraged capital structure policy, it may find its freedom of action restricted by its creditors and its profitability may hurt as a result of paying high interest expenses.It may also affect the companys profitability and liquidity when the business has trouble meeting Operating and debt liabilities during unfavorable economic conditions. Additionally, too lots debt versus equity would potentially affects business credit rating, which is the evaluation of a companys ability to give principle and interest on debt obligations. Since the company do not have much experience on carrying debt on their lance sheet, we recommend the company to start the process slow.