In the recent times, competition between businesses operating in the same field has drastically surged. As indicated by Artikis (2007), 34% of businesses, which opened in 2009, were forced to shut down due to the enormous level of competition existing between the firms. To avoid this scenario, both emerging and well-established businesses, such as multinational firms, have adopted various methods of survival, including acquisition and merger, among others. Competition Bikes Inc. is an international firm that intends to expand in the Canadian markets. To compete with other firms in this market, the company is considering to merge or to acquire Canadian Biking Inc. facility. By acquiring Canadian Biking Inc. facility, the Competition Bikes Inc. will significantly benefit from working capital for operational purposes, among other notable benefits. This paper puts forth a summary report that analyzes this proposed expansion of Competition Bikes Inc to the Canadian market.
- Recommend a capital structure approach that maximizes shareholder return
As indicated by Garrison (2001), capital structure is a mix of firms’ long-term debt, short-term debt, preferred and common equity. It can also be indicated that capital structure is the method in which companies finances their entire operations as well as growth by employing various sources of funds. A company capital structure is the composition or the structure of the liabilities. For instance, a company which sells $30 billion in terms of equity and $90 billion in terms of debts is termed as 30% in equity and $90 billion in debts. Based on the above arguments, it can categorically indicate that there are two types of capital: debt and equity capital. Each of two has its own advantages and drawbacks, thus forcing many corporate attempts to seek ways of adopting the two methods for effective operation.
For the case of Competition Bikes Inc., it has been trading in the Chicago Midwest Exchange for the past eight years (last traded at 3.10 per share). To increase the value for the shareholders, the firm should adopt equity capital approach. There are two types of equity capital. Retained earnings, the first type, provide profits for the previous years that have been preserved by the company and applied in order to enhance the acquisitions, fund growth, balance sheet or expansion. The second type of working capital is contributed capital, which is the fund that was initially invested in the business for the purpose of exchange of ownership or stock shares. Although many companies consider equity capital as the most expensive type of capital due to its cost, its return can attract a lot of investment.
- Discuss capital budget areas that raise concern
Capital budgeting is a planning method that is used to find out if the company’s long-term investments like machinery replacement, new merchandise, research development, and new plants are anticipated to generate income or assist the operations of business in a number of years. An area that is most likely to raise a concern is that capital-gearing ratio. The capital gearing ratio = (Capital Bearing Risk) or (Capital not bearing risk). Capital bearing risk comprises (a payable risk interest) and preference capital (a payable risk dividend at fixed rate). From this analysis, it can be concluded that capital-gearing ratio = (Equity shareholders’ funds); (Debentures + Preference) (McCauley et al, 1999).
- Discuss how working capital can be properly obtained and managed for the Canadian expansion
Working capital is the available capital for running day-to-day activities of a company. Working capital can also be defined as the surplus of permanent capital in addition to long-term liabilities over a company fixed assets. Working capital control can be divided into fields which deal with payables, inventory, cash and receivables. For the company to continue trading, it must be in a better position of meeting its instantaneous commitments. As a result, it is very advisable for the company to have sufficient cash at all times. A good working capital is also essential for the company development and long-term success.
A working capital should be managed efficiently. In a case where the working capital is managed poorly, it can decrease the company’s liquidity, profitability, and ability to invest in prolific assets, such as machinery and the plant. Every company needs to budget a right amount of working capital that can meet future anticipated needs. The working capital amount necessitated by a company depends on many aspects, such as credit policy of the company, business activities, period of the year, and proportional activities, among others. In some uncertain conditions, a company should hold a minimum level of inventories and cash based of likely revenue (McCauley et al., 1999). In order to manage the working capital for the Canadian expansion, the three types of policy of the working capital could be applied: aggressive, conservative, and moderate.
For an aggressive working capital policy, the company should embrace a minimum level of inventory, thus minimizing the costs. However, the company might not be able to effectively combat the overwhelming demand due to the low stocks. Some of the companies that adopt this system normally finance its part of permanent assets with short-term debt, due to a lesser cost of short-term debt compared with long-term debt. This policy, albeit risky, is the best for the Canadian expansion due to its higher returns.
- Discuss whether Competition Bikes Inc. should merge with or acquire the Canadian Biking Inc. facility
Based on the financial performance from both companies, Competition Bikes Inc. should merge with the Canadian Biking Inc. This will enable both companies to share their business ideas, information, vision, and finances, thus enabling them to flourish in a stiff market.