Competition Bike Incs

A1. Capital Structure

Capital Structure is the way mixture between short term/long term debt common stock and preferred stock (Wikpedia, 2013). I would recommend, Competition Bikes Inc (CBI) is 50 percent in preferred stock and 50 percent in common stock. This would help strengthen CBI financial infrastructure and improve their finical earnings. This will help increase CBI net earnings and shareholder will get bigger return on their investments. CBI should keep focusing on having their employees deliver great customer service. This will help improved their image and increase the value of the company (Wikipedia,2013).

There are two areas that need to be analyzing debt capital and equity capital. Debt capitalrefers to the long term Debt capital usually is more expensive form of equity. . Equity capital investors will invest their money for a share of the company (Wikipedia,2013). 50/50(preferred/common stock) will generate the most money. The following chart show the different options( 9% bonds, 50/50 Common/preferred(5% $50par), 20 % 9% bonds/common stock, 40%/9% bonds/common stock, 60%/9% and bonds/common stock. 50/50(Common/Preferred) and 40%/9% bonds/common stock yield the highest results.

A1a. Justify

A 50/50 investment in preferred/common stock will yield the most earning per share during the first three years. During year 4 and year 5 the nine percent bound will have the highest earning per share. Investors would have the best return with 50/50 preferred/common stock.

Traditionally preferred stockholders will get a bigger payout than common stocker hold in case the company needs to liquidate their assets. The difference between common stockholder and preferred stock holder is that preferred stock is less risky. Preferred stock holders will have less dividend payout compared to common stock payout. Preferred stock holder are guarantee regular dividend payment over amount of time (Stallman). Preferred investors will remain in control of the company and they will be to make critical decisions that could have a major effect on CBI. Preferred stockholders will be the board of directors. Board of directors will be able to take advantage of the American tax loophole system. Money gain from the tax deduction can be used to pay off debt capital. This will also have the highest earning per share in the first three years. Securing a 9% bond in the fourth and fifth year will give CBI the second highest earning per share. 50/50(preferred/common stock) will generate the most money.

The following is factor analyzed using 15k preferred stock dividends(Earnings before taxes and interest). The 15,000 show the difference between the low and demand in US dollars with preferred stocks.

In order for 600k to be raised for capital improvements I was wondering what the earning per common share would be.

EARNING PER COMMON SHARE

The following chart shows the earnings before interest and taxes from year 9 to year 13. The charts also show low and moderate projection of sales. The earning per common share was calculated. The 50/50 preferred and common stock is almost equal . Year 9 only had a difference of .01 in the low projection scenario. The 50/50 (preferred/Common stock) gave greater results than all other options. Nine percent bond was the second highest earning per common share. The following chart will show the data.

9% bond 50/50 Common/preferred

Year 9 Year 9

Low 0.016 Low .032

Moderate .043 Moderate .053

Year 10Low 0.024 Moderate .058 Year 10 low 0.038 moderate 0.044

Year 11 Low .031 Moderate .072 Year 11 Low 0.075 moderate 0.05

Year 12 Low 0.041 Moderate .089 Year 12 low 0.082 moderate 0 .051

Year 13 Low .042 Moderate 0.098 Year 13 low .088 Moderate 0.054

The earning per common share was higher for 50/50 common and preferred stock. 50/50 common and preferred stock was .16 higher for the lower demand and moderate demand was .10 higher for year 9. Year 10 was 14 higher for low demand. Year 10 Moderate demand nine percent bond was higher than 50/50 common and preferred stock. Year 11 low demand for 50/50 common and preferred stock was .044 higher 9 percent bond.. Year 11 9 percent moderate demand was higher than 50/50 Common and preferred stock. Year 12 low demand 50/50 Common and preferred stock was .041 higher than 9 percent bond.. Year 12 9 percent bond moderate demand was higher than 50/50 common and preferred stock. Year 13 50/50 low demand was .046 higher than 9 percent bond. Year 13 9 percent moderate demand was .044 higher than 50/50 common and preferred stock.

20% - 9% bonds and Common

Low/ Moderate

Year 9 0.033 /0.051

Year 10 0.038 / 0.061

Year 11 0.043 / 0.071

Year 12 0.050 /0.082 /

Year 13 0.051/ 0.088

40/9 % bonds/Common

Year 9 0.030 / 0.050/ Low/moderate

Year 10 0.035 /0.060/ Low/moderate

Year 11 0.041/ 0.071/ Low/moderate

Year 12 0.048 / 0.083/ Low/moderate

Year 13 .049/ 0.090 Low/Moderate

60/9 % Bonds/Com

Low/Moderate

Year 9 026/ 0.04/

Year 10 0.032 / 0.060/

Year 11 0.038/ 0.071/ 0

Year 12 .046 /0.085/

Year 13 .047/.092

NET EARNINGS

The following charts show the average net earnings from year 9 to year 13. I calculated the low projections and moderate projection sales. The data below will show 50/50 common and preferred stock generate highest rate of return for shareholders.