Professional Documents
Culture Documents
Darktonics Comparison
Darktonics Comparison
Daktronics Project
Solvency
1.12
years, relative to the industry average was
0.99 classified in the Median spectrum of the scale.
Daktronics lowest recorded Quick ratio was 0.99
in 2007, this reading is well below the industry
average which state that an average below 1
symbolizes the inability to meet short term
Category 1
obligations. The reduction in Daktronics’s cash
2006 2007 2008 2009
balance while increases in its liabilities depressed
its quick ratio. None the less in 2009, the
company’s Quick ratio then recovered increasing by 35.7%.
Figure
CURRENT LIABILITES TO INVENTORY
230 4
225
220
215
210
205
200
195
190
185
highest reading of 224.9 which was in accordance to the stipulated industry average. This chart
demonstrates a vivid trend as the business seeked to reduce its liabilities to inventory figure
throughout the years moving from 218.13 in 2006 to 199.28 in 2009, illustrating an average
annualized change of 10.77%.
Finally, A time-trend analysis also revealed that Daktronics lowest fixed asset to net worth was
identified in 2006 of 45.14. The proportion of fixed assets to net worth increased by 69.9 % in
2007. Progressing throughout the years 2007 to 2009 the company reduced its fixed asset to Net
worth ratio by an annualized average of (<<<<<) each year.
Daktronics Project
55.64
70.28
76.68
45.14
0.00 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00
In term of Solvency it must be noted that 2007 all solvency ratios had their highest readings this
could be attributed to the business expansion its operations or delayed payment to creditors.
Efficiency Ratio
As the business’s sales grew so did its inventory holding. Throughout the 3 years investigated
Daktronics highest sales to inventory ratio occurred in 2009 amounting to 11.32 times, trend
analysis shows the business’s increasing revenue growth suggesting its inventory must rise also
to meet demand. The 2008 sales to inventory turnover was 87.37 percent of 2009’s figure. The
lowest reading for the company was in 2007 which amounted to 9.47 which was almost less than
half of the industry’s average for that period. Demonstrating that Daktronics was experiencing a
period of high sales
Sales to Inventory
11.50
11.32
11.00
10.50
10.00
9.89
9.50
9.45
9.00
8.50
2007 2008 2009
Column1
11
10.5
10
9.5
8.5
2007 2008 2009
In terms of sales to net working capital Daktronics ratio increases gradually over the three years
under investigation, suggesting either the business sales are growing exponentially as compaired
to net working capital or net working capital is diminishing. The business recorded its highest
sales to net working capital figure in 2009 where its reading of 11.32 exceeded the industry
standard by over 2.5 points, in 2008 the reading was 9.89 and its lowest reading in 2007 of 9.45
categorizing Daktronics at the median spectrum of the industry.
Profitability Ratios
In terms how well the business is producing its core products and management’s ability
to promote sales the company’s reading was on a decline from a reading of 8.24 in 2007 to 6.83
in 2009 a 19.3 percent reduction in 2 years this reduction insinuates that the business has been
undertaking additional expenses over the years. According to the industry standards for
Daktronics has a score above the upper quartile of the industry average for all 3 years, suggesting
that the company can efficiently convert sales to profits.
A time-trend analysis shows the business’s return on assets declining throughout the three
years. Its highest reading was that of 2007 which amounted to 9.19 %, this figure fell by an
average of 0.53 percent yearly. Daktronics lowest return on assets was in 2009 amounting to 8.13
%. Although the return on asset fell Daktronics still maintained a reading in the upper quartile of
Daktronics Project
the industry standard for the 3 years thus implying that the company is efficiently managing its
assets to generate earnings.
According to figure, the return on net worth has been on a decline between the years
2007 to 2009. This demonstrates the business’s decrease in profitability over the years.
Daktronics had an annualized percentage decrease of 1.71 %.
Profitability
2007 2008 2009
Return on Sales (%) 8.24 7.86 6.83
Return on Assets (%) 9.19 8.90 8.13
Return on Net Worth (%) 15.89 14.30 12.47
According to the common sized balance sheet of Daktronics certain trends have been revealed in
relation to the different classifications such as assets, liabilities and stockholder’s equity
components. Beginning with the assets section the cash balance for Daktronics financial
displayed various fluctuations over a four year period.
4
3.17
2
0.97
0
1
Daktronics Project
increasing by 2.2%. In 2009 its cash account balance was 11.24%. Daktronics had it greatest
cash account holding in the year 2006 and this was followed by 2009 three years later.
Throughout the four year period the percentage of Daktronics Account receivable figure had
constantly declined by an annualized average of 1.4%. This percentage of sales amounted to
23.10 percent in 2006 its highest and fell to 18.9 percent in 2009, the difference in percentage
change over the 3 year period amounted to 4.2 percent of the total Asset figure, a dollar value of
$13644.79. Pertaining to the inventory classification, there was an initial increase in inventory
figures between 2006 and 2007 this increase accounted for 1.39% of sales. Subsequent to 2007
the company’s inventory holdings were constantly reduced moving from 17.24% to 15.82% in
2009 a total percentage change of 1.42.
Current Assets
According to figure the business’s total
current assets demonstrated no obvious
71.60 trend, the current asset total was highest in
63.71
55.67 56.27
2006 amounting to 71.6 % and lowest in
2007 where it fell by 15.93%. The 2
preceeding years the total current asset
Common Sized 2006 Common Sized 2007 Common Sized 2008 Common Sized 2009
figure increased by an annualized average of
4.02%.
In relation to the non-current asset portion of Daktronics balance sheet for the first three years
there was an increasing tread as the business’s non-current asset increased from 28.40 % in 2006
to its peak point of 44.30 % in 2007, in 2008 the business reduced its non-current asset holdings
to 43.73 %. The final year investigated the total non-current asset holding declined by 7.44 %.
Daktronics Project
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
Common Sized 2006 Common Sized 2007 Common Sized 2008 Common Sized 2009
Daktronics recorded a total liabilities reading of 37.09 % in 2006, following this there was a
spike in total liabilities for 2007 to 42.18 % and then a downward trend as the business reduced
the amount of liabilities it held for the following 2 years. The annualized change was 3.705%
yearly.
Finally the equity figure of the business fluctuated throughout the period under investigation as
in 2006 it recorded a 62.91% reading this amount fell in 2007 to 57.82%. One year later the
business increased its equity figure by 4.41% and in the final year investigated 65.23%.
Income Statement
Selling General and Administrative Expenses for 2007 amounted to 17.52% of sales, this figure
increased in the year 2008 by 0.14% and decreased in 2009 to 15.17 %, this decrease in expenses
infers the due to the business’s increased cost of sales figure Daktronics was trying to reduce its
other operating expenses to remain profitable.
In relation to earnings before interest and taxes, depreciation and amortization for 2007
succumbed to 11.43%, in 2008 the business recorded its highest EBITDA of 12.09 % this figure
then fell by 1.06% in 2009 giving a reading of 11.03.By deducting both depreciation and
amortization the resulting classification is EBIT. The EBIT of Daktronics displayed a downward
sloping trend, 2007’s EBIT amounted to 8.24% while between the years 2008 to 2009 the EBIT
decreased by a 0.55% annualized average.
The business paid its highest interest expense in 2008 of .28 % while its lowest reading was that
of 2009 amounting to 0.04 %, and in 2007 Daktronics paid 0.17 % in interest expense.
Daktronics net income for the three years displayed a downward trend as net income fell from an
all-time high in 2007 of 5.64% to 5.25% in 2008 and its lowest reading in 2007 of 4.54%.
Through an analysis of the business return on net worth it could be concluded that the stock price
performance of the business is consistent with the researchers findings as both return on networth
and stock price performance displayed identical downward trend movements over a two year
period 2007 to 2009
Return on Assets
3.50
3.00
Stockholders Equity
66.00
2.50
64.00
2.00
62.00
1.50
60.00
1.00
0.5058.00
0.0056.00
Common Sized 2006 Common Sized 2007 Common Sized 2008 Common Sized 2009
54.00
Common Sized 2006 Common Sized 2007 Common Sized 2008 Common Sized 2009
Comparison of the Historical and
Forecasted Ratios of Daktronics
The various ratios obtained from an analysis of Daktronics financial statements were forecasted
using a percentage of sales model. In reference to the graphs the historical period is outlined in
blue while the forecasted period was highlighted in green.
Daktronics Project
2.00 2.00
70.00 1.61
1.44
60.00
1.50 56.29
60.00 54.03
1.50 50.00
1.00 48.34
50.00
Axis Title
40.95 39.76 40.00
0.50 1.00 37.74 37.75
40.00
0.00 30.00
30.00 2006 2007 2008 2009 2010 2011 2012 2013
0.50
20.00 Axis Title 20.00
Total Liabilities / Net worth (%) Fixed Assets / Net Worth The
Current Liabilites / Net Worth(%)
historical data illustrates an initial decline in the quick ratio between 2006 and 2007 and then an
increase between 2007 and 2009. Conversely the forecasted period displays an upward trend as
the quick ratio moves from 1.80 in 2010 to 2.31 in the year 2013 an annualized average increase
of 0.173 %. The lowest quick ratio of both the historical and forecasted periods were 0.99 times
in 2007 and 1.80 times in 2010 respectively, suggesting that at Daktronics lowest forecasted
quick ratio the business is still able to at cover its liabilities as opposed to the historical figure.
Further analysis of the historical data reveals 2006 quick ratio to be 1.50 times while 7 years later
the Daktronics’s records its highest quick ratio reading of 2.31 times this comparison illustrates
the historical period’s peak quick ratio to be 64.9 % of the forecasted. According to figure ___
Daktronics historical current ratio decreased between 2006 and 2007 subsequently the ratio then
increased by an annualized average of 0.29 % over the next 3 years. The Current ratio trend was
similar to that of the quick ratio in relation to the upward trend of the forecasted period. The
lowest of both periods remained 2007 and 2010 with a current ratio of 1.44 times and 2.28 times.
The disparity between the lowest levels of both periods resulted in a variance of 0.58 in favor of
the forecasted period. While the highest levels 2006 and 2013 this disparity amounted to 0.68.
Diagram – illustrates the movement of three balance sheet items expressed as a percentage of net
worth total liabilities, current liabilities and fixed assets. According to the time trend analysis it
could be concluded that both current liabilities and total liabilities move in the same direction, an
initial increase in the between 2006 and 2007 and then a 3 year decline. The current assets to net
Daktronics Project
worth’s highest reading of the historical period was observed in 2007 where it amounted to 67.06
% while through the forecasted period the highest reading was 40.47% in 2010.
At the beginning of forecasted period current liabilities as a percentage of net worth fell
drastically by 39 % of 2007 ratio. Throughout the forecasted period current liabilities to net
worth ratio displayed a downward trend for the first three years with an annualized average
decline of 1.06 % while in the final year of the forecast this ratio increased by 0.01 %. The
lowest historical current liabilities to net worth reading was 48.34 % in 2009 conversely in the
forecasted period the lowest recorded current liabilities to net worth was 37.74 in 2012. 21 %
less than the historical period.
Historical Total liabilities in the period 2006 to 2009 trend patterned that of current liabilities, a
sharp increase followed by an annualized decrease of 9.36 %. Conversely, throughout the
forecasted period the total liabilities to net worth reading displayed no consistent trend as it
increased between the 2010 and 2011 by 0.41 % then fell in 2012 to re-increase in 2013.
The fixed assets to net worth displayed an initial increase in the historical period and then decline
each year into the forecast. The highest fixed asset to net worth ratio of the historical data was
observed in 2007 of 76.68 while the highest reading of the forecast was that of 2010 totaling
50.26 a 34.4 % reduction. The historical fixed asset to net worth fluctuated at an annualized
average of ---% while that of the forecasted period fluctuated at a (higher/ lower rate) of ----%.
The lowest fixed asset to net worth ratio was observed in 2006 (historical) while the lowest of
the forecasted was 39.82 in the forecasted period.
Daktronics Project
2012 202.53
2011 202.53
2010 202.53
2009 199.28
2008 204.16
2007 224.90
2006 218.13
185.00 190.00 195.00 200.00 205.00 210.00 215.00 220.00 225.00 230.00
The historical period current liabilities to inventory ratio displayed a slight increase of 6.77 and
then an annualized downward decline of 12.56. The current liabilities to inventory ratio
displayed no fluctuation throughout the forecasted period therefore the ratio was fixed at 208.90
suggesting that both current liabilities and inventory move in exact proportion with each other
throughout the forecast. The forecasted period current liabilities to inventory ratio amounted to
95.71 % of the current liabilities to inventory ratio of the historical period.
All forecasted debt to equity ratios were Debt to Equity Total liabilities/ Total Equity
the historical period. The forecasted period demonstrated a fluctuating trend while the historical
period initially had an increase proceeded by a period of decline in D/E.
The asset to sales ratio depicted as the column chart in diagram – illustrates a historical
downward trend between the years 2007 to 2009 conversely the asset to sales figures obtained
from the forecasted model suggest the business’ asset to sales ratio increases by an annualized
average of 2.67%. The largest asset to sales ratio of the historical period was observed in 2007
amounting to 61.37 while the highest reading of the forecasted period was 2013 where the ratio
amounted to 79.64 a total percentage increase of 18.27 %. The lowest reading for both models
was recorded in 2009 of the historical period and 2010 of the forecasted demonstrating a 23%
increase.
Sales to net working capital in both historical and forecasted periods displayed similar downward
trends. The historical period displayed a 33% annualized average decline while the forecasted
period decline was 12%. The highest historical calculation was in 2007 amounting to 9.65 while
that of the forecasted period was 3.74 a total reduction of 5.91. The historical period saw its
lowest sales to net working capital in 2009 of 5.57 while the forecasted period ratio was 2.67 in
2013 a total decline of 2.9.
Diagram__ illustrates both the historical and forecasted periods for the current liabilities ratio of
Daktronics from the period 2006 to 2013. Through careful analysis one could identify that the
forecasted period had no fluctuation in current liabilities to inventory while the historical period
Daktronics Project
had an initial 3% increase followed by an average annualized 5% decrease. The gap between the
historical and forecasted periods demonstrated a 2 % increase.
Sales /Current
Net Working Capital/ (times)
Liabilities (CA-CL)
Inventory (%)
2013
2013 2.67 202.53
2012
2012 2.88 202.53
2011
2011 3.28 202.53
2010
2010 3.74 202.53
2009
2009 199.28 5.57
2008
2008 204.16 7.99
2007
2007 9.65 224.90
2006
2006 218.13
0.00 2.00 4.00 6.00 8.00 10.00 12.00
185.00 190.00 195.00 200.00 205.00 210.00 215.00 220.00 225.00 230.00
Sales / Net Working Capital (times) (CA-CL)
Current Liabilities / Inventory (%)
5.00
4.00
3.00
2.00
1.00
0.00
2007 2008 2009 2010 2011 2012 2013
Axis Title
The return on asset ratio for Daktronics historical and forecasted periods demonstrate a
downward trend. The forecasted period however revealed higher return on asset for all four years
starting with 9.22 % the highest in 2010 to 8.56 % in 2013. The historical period’s return on
asset decline by a greater disparity throughout the years 6 % while the disparity between the
Daktronics Project
forecasted periods amounted to only 2.33 %. There is an expected 12 % increase moving into the
forecasted period of Return on Assets Ratio. The highest return on asset throughout both the
historical and forecasted period were 9.19 in 2007 and 9.22 respectively. The variance between
the highest ROA on both the historical and forecasted period amounted to 0.03. The lowest ROA
of both periods were in 2009 of 8.13 and 2013 of 8.56.
Daktronics return on net worth of displayed a downward trend throughout the historical period
while for the forecasted period a downward trend was observed only for the first 3 years
followed by a 1 % increase in the final year. The average return on net worth for both periods
amounted to 13.41 %.
Return on sales for Daktronics displayed a downward trend in the historical period while
demonstrating a slight upward trend in the forecasted period. The highest point of the historical
period was 2007 of 8.24 while that of the forecasted period was 10.07 a 1.83 % change. The
average reading for both the historical and forecasted period return on sales was 9.02%.
3.00
2.00
1.00
0.00
2007 2008 2009 2010 2011 2012 2013
Axis Title
The historical period of Daktronics demonstrated a higher accounts payable to sales ratio in
comparison to the forecasted period. The largest accounts payables to sales ratio of both periods
was 6.31 in 2008 while the highest of accounts payable to sales ratio for the forecasted period
remained constant throughout at 6. In 2010 the beginning of the forecasting period AP to sales
demonstrated a 13 % increase in comparison to 2009 calculation.
Daktronics Project
9.89
in 2007 of 9.45 (times). The forecasted 10.00
9.45
period displayed no fluctuation as the 9.50
-$ -$ -$ -$ -$ -$
CapEx 58,865.00 32,203.00 16,037.00 19,785.65 20,949.52 23,510.0
Net borrowing 0 0 0 0 0
-$ $ $ $ $ $
Equity Free Cash Flow 11,719.00 15,326.00 30,069.00 24,040.54 27,803.73 37,422.9
$ $ $ $ $ $
Minimum Cash Held 20,000.00 20,000.00 20,000.00 20,000.00 20,000.00 20,000.0
$ $ $
Daktronics Afford to payout 4,040.54 7,803.73 17,422.9
5. According to the case the company employs a steadily increasing dividend payout policy
where dividends grew between by 1- 1.5 cents per share throughout 2004 to 2009. The gradual
increase in dividends moved from 9% in 2004 exceeding this value by 6 percentage points in
2009. Daktronics had reached maturity as company growth had now slowed, and there were no
prospects for new acquisition or extensive capital expenditure. The objective of the organization
now is to maintain its market share and perhaps enter new markets to explore and add
incremental growth. Throughout the company’s growth stage Daktronics became excessively
liquid i.e. Daktronics generated more cash than it had use for, suggest its dividend policy could
be increased.
In restructuring a dividend policy, decision makers must take into consideration numerous
factors such as its clientele, the implications of tax on cash disbursements, the economic outlook
and finally the type of signal the organization wises to send to the market.
In my opinion the company should increase the current dividend payout but in accordance to a
structured residual growth strategy to demonstrate stability, sustainability and growth to the long
Daktronics Project
term investors the company seeks to attract. Based on the forecast model utilized to analyze
Daktronics dividend policy the business estimates positive net income, free equity cash flows
and a cumulative dividend payout of ------ and thus allowing financial coordinators to structure
dividend payout in such a way to signal growth while ensuring stability. (use forecast and state
why) (Create a model that shows this and reference it)
Modigliani and Miller’s signaling hypothesis states, the change in pattern of dividend payments
signal important information to both the market and shareholders. Increases in the current
dividend payout policy would identify to the shareholders that the company either is
progressively growing conversely the opposite also holds. Therefore it’s important to implement
a sustainable dividend policy, because any sudden unjustified negative shift to a dividend payout
would face heavy scrutiny in the market as investors perceive that as a sign of weakening
business fundamentals.
Conversely, due to this disbursement of funds the business retained earnings would be reduced.
Under an economic anomaly an inadequate ratio of retention to disbursement, could place the
company into a situation where it’s either illiquid or its debt ratio has to be increased which
intuns affect the capital structure for example the current economic problem Daktronics is being
faced with. Furthermore, the increase in dividend payout would generally force the market
deflate the share price of the stock, so as to prevent a form of arbitrage known as the dividend
capture, suggesting increasing Daktronics dividend policy would reduce its stock price. The
increase in the dividend payout leads to a reduction of usable funds which may be construed
according to the signaling hypothesis that the long term growth potential of the firm is reduced.
In the event that an increase in dividend take place, taking into consideration Daktronics capital
structure, equity profile excessive liquidity problem and economic uncertainty, the most effective
Daktronics Project
way to proceed would be through special dividends. This special dividends are a onetime capital
disbursement separate from the normal recurring cycle of dividends because special dividends
are normally greater than regular dividend payments this would help to alleviate the company’s
overly liquid problem.
This policy is favorable for individuals who form part of a lower taxable income bracket as their
tax liability wouldn’t be greatly affected and their return on investments would be increased, also
those investors who risk tolerance surround, that of stability a special dividend payout would be
favorable to them as they receive greater cash payments as a source of income. A Special
dividend policy would have both positive and negative effect on investors who are a part of a
higher income tax bracket. These individuals are positively affected as special dividend payouts
are subject to certain tax exemptions thus reducing their tax liability and increasing their returns.
Conversely investors of a higher tax bracket are often those who seek to profit mainly from
capital gains this special dividend policy, adversely affects them in the sense that the increase in
dividends would also depress the stock price therefore reselling the stock at an appreciated price
would be near impossible.
Based on Daktronics’s maturity the company has little aim for expansion therefore, withholding
higher dividend payments to shareholders reduces shareholder wealth as the excess liquidity
could be redistributed and reinvested at a higher return thus increasing shareholder wealth.
Such a policy has various effects on investors those equity investors who aim to invest for short
term, and profit from capital gain would be displeased with such a strategy as they would be
more inclined
The researcher logic towards this conclusion was due to the fact that Daktronics offers a steady
dividend policy with the possibility of gradual growth (a structured residual growth). In my
opinion the policy should be maintained but restructured in
Daktronics Project
Total
Sha
Val
Tod
8. Capital Structure
Capital structure relates to the combination of both debt and equity financing to fund business
operations. Daktronics key leverage ratio demonstrates that the company relied mainly on equity
financing, as the company’s average debt ratio over the 8 year period under investigation
amounted to only 31 % suggesting, the financing mix comprised of 69% equity. The case notes
Daktronics utilizes a conservative capital structure and its growth was financed primarily through
the issuance of new shares or through retained earnings. Decision makers kept debt low and
equity moderately high. Based on the fact that equity financing in no way obligates the firm to
repay equity investors their initial investments Daktronics conservative capital structure reduced
its interest liability, allowing the firm more flexibility in relation to its retained earnings. Greater
equity to debt financing proportion reduces the business risk of bankruptcy, considering if
Daktronics suffers a setback and fails to make its interest payments, a large debt obligation
could’ve force the firm into bankruptcy. Equity investors have no such rights. To evaluate the
various effects of capital structure mix on the value of the firm we draw on information
presented by 3 famous economist Modigliani and Miller, . Modigliani and Miller’s proposition
Daktronics Project
of capital structure irrelevance assume no taxes exist, this theory suggest that the free cash flows
of a firm are not affected by the mix of debt or equity, therefore though the capital mix may vary
the value of the firm’s free cash flow and the overall value of the entity remains constant. Capital
structure irrelevance suggests that because Daktronics is financed utilizing a safer/more
conservative method the firm’s value would remain the same even though it increased its
leverage. According to a model created ____ the distributions of the different cash flows
between equity and debt would change but the overall value of the firm remains constant.
Moreover, because Daktronics capital structure focuses on conservatism/ safety it overlooks the
major contributions that a capital mix financed through adequate levels of debt can provide for
the overall value of the firm and its shareholders. To evaluate this statement the researcher makes
reference to Modigliani and Miller Trade of theory of leverage, this theory recognizes the tax
benefits obtained through issuing interest payments, these interest payments are tax deductible as
they reduce the tax liability of the firm and this increases its value. Therefore increasing a firm’s
debt adds value to the company but only up to a point. This scenario was evaluated though the
use of table ___. Applying this theory to a model constructed using Daktronics’s financials
reveals the value of the firm is maximized through utilizing no more than 60% debt, in such a
case the price per share is greatest and so is the value of the firm. Currently Daktronics financing
mix comprises of 31% total debt. In comparison to the model constructed that the company is
under levered meaning it is not taking advantage of the annual interest tax shield provided by
debt financing.
Under the assumptions of the pecking order theory which postulates, the cost of financing
increases with asymmetric information, firms ought to follow specific rules on how it prioritizes
it’s financing strategies. Based on the hypothesis that firms only issue new shares if its
overvalued this sends signals to the market, resulting in speculative thinking, which
inadvertently reduce the current value of the firm. Therefore this theory prioritizes the use of
internal financing, then the use of debt and finally external financing as a means of last resort.
Daktronics’s capital structure conforms to the pecking order theory considering its heavy
dependence on using retained earnings as a source of finance followed by the use of debt.
Utilizing this strategy firm possess no fixed capital structure because the amount of debt or
equity is only determined after its internal financing has been exhausted, therefore there is no
Daktronics Project
target amount of leverage to firm should possess. For example Daktronics debt ratio and it
capital expenditures of 2007 revealed that only when the firm had exorbitant capital expenditure
did its total debt ratio increase significantly, as its internal source of financing may not have been
sufficient therefore the company had to rely on debt illustrating Daktronics conformity to the
pecking order theory.
Under the pecking order theory Daktronics debt ratio would always be assumed to be low
because of the company’s highly liquid structure. In a case where the firm needs financing under
the pecking order it would dissolve a portion of the retained earnings therefore leaving it debt
capacity unaltered or to a minimum. (Reference ratio table)
Modigalani and miller’s theroy of a tax environment, an increase in debt would increase control
over the company as borrowing funds and repurchasing shares lowers the amount and influence
of share holders moreover debt holders have no influnece in business operations.Due to an
increase in debt under this theory, it reduces the agency cost faced by the firm as managers now
must ensure efficiency throhgout the organization to ensure debt obligations are met. Conversely,
the increase in debt the firm now increases daktronics fixed expenses interms of principal and
interest this ultimately can reduce growth. A high composition of debt limit future ability to rain
equity capital because the firm would be considered a high risk and this ultimately ifluences the
amount of return equity investors require.
The actual cost of debt is less than the nominal cost of debt due to tax benefits.
The leverage of the firm is determined by how much t exhausted internal financing is the same
applies for equity the way in which the level of debt to equity is determined is contingent on the
size of project to be undertaken.
the optimal capital structure of a firm is dependent on type of industry which its apart of as well
as its ability to --------------------------------.