Columbia Capital Structure

Some other risk factors include substantial cyclical fluctuation, the effects of unseasonable bear conditions, and the popularity of the outdoor activities. In order to minimize the negative impacts on this business, the company started a series Of strategic initiatives, such as product innovation program, new multi-channel and multi-country direct-to-consumer platform, information management and their enhanced marketing efforts. alone those improvement and implementation involve significant investment in SO&A expenses and its fixed cost.Thus it is all-important(a) to look back and evaluate their current bang-up structure and payout policies to exam whether the company would start on carrying debt or whether they have residual cash return to their investors. Despite Columbians regular dividend payouts and stock repurchases, they does not celebrate a healthy cash and short-term investment ba transmit. According to the financial data provided in yearbook Report, the major financ ing needs include capital expenditures, works capital expenses, stock buybacks, and dividend payouts. In 201 1 , Columbia spent $78 zillion in capital expenditure and $92. Million in working capital investments which was increased from $29 million and $78. 9 million from last year. even though the companys realize income increases over time, they have generated negative free cash flow for both fiscal year of 2011 and 2010 with just about $14. 6 million and $53 million respectively. Currently, the company sales short-term investments to finance those capital expenditures which should not be a long 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 favorableness and its capital structure as the end of Fiscal year 2010, Columbia will have significant financial difficulties to meet capital expenditure requirement and will have emitted resources for distribution to investors in the fo rm 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 place activity requirements.We suggest that the company need to revise their capital structure policy by change magnitude debt to finance the business activities. Debt not only can provide coverage for any general be and unforeseen expenses, it in addition serves as a tax shield allowing more capital to be operational to investors. The assumption here is that the company can earn more in tax savings from borrowed notes 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 ratio, 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 compar ed 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 highly 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, in addition much debt versus equity would potentially affects business credit rating, which is the evaluation of a companys ability to repay 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.