Introduction: equity percentage of 4.17. Business risk of

Introduction:

            When
looking at a company is it important to look at the balance sheets to make sure
that the income is in line with the company expenses. Looking at the balance
sheets will give a person a good sense of how the company is doing and if the
company is being profitable. The next information to look at for a company is
the debt to equity. This will help the person to understand how the company is
using the equity it has and how much debt the company is using. The debt might
just be to help minimize the amount of taxes it must pay at the end of the
year.

Introduction of company:

            The
publicly traded company that will be used is John Deere. This company is one of
the bigger businesses that sells and builds different types of tractors that
are manufactured for either residential, farmers, or construction. John Deere
was founded in 1837 and has grown over the years to become one of the most recognizable
names in the industry (Our History).

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

Company capital structure:

            John
Deere currently has over 65 million in assets and over 25 million in long term
debt. The company also has over 14 million in short term debt. When looking at
the balance sheet for the company it looks like the company does take advantage
of the interest on debts to help with taxes every year. On the income statement
dated 10/29/2017 the company had interest expenses in the amount of almost
$900,000 (NASDAQ.com, n.d.). The company has a debt to equity percentage of
4.17.

Business risk of capital structure:

Business risk of
capital structure is when the company managers need to determine if the current
debt of the company is still at low level of risk based on what the company is
bringing in for income.  When/if the
company managers feel that the economy or the business is not doing well the decision
will need to be made on if some of the debt needs to be decreased to get a
lower risk level (Sherman, n.d.).

John Deere is currently
using the capital structure to use the interest amounts to help with the
company taxes. The company gets more choice control over the company when using
debt in this way. The company has a low debt to equity ratio showing that the
company has enough income to pay the debts that it has with no problem (Sherman,
n.d.).

            Managers
of the company need to evaluate the company every quarter to make sure that company’s
finances are still on a good path which will allow the company to succeed. This
company is doing well with managing the company finances and will need to
continue to monitor the financial statements (Sherman, n.d.).

Introduction of Modigliani and Miller theory:

            Modigliani
and Miller theory was developed in the 1950’s and is a theory in which the
company is not faulted for having more debt or having more equity. When looking
at a company to get a value, the capital structure should be irrelevant. The
value of the company should be done based on if there is growth potential for
the company. When a company has a higher value the value of the stock for that
company will be priced higher. After some time of an investor having some stock
if the company does not see growth, the value of the company would drop (BENSON,
n.d.).

            There
are many different assumptions that are used in this theory. The first
assumption is that there are no taxes that must be paid. The theory assumes
that the companies are in perfect capital markets, meaning that all investors
have the same information and there is not influence on price from bigger
investors. Another assumption is that all companies have a fixed investment and
having new investments will not affect the value of the company. The last
assumption is that the same discount rate is applied to all stocks (BENSON, n.d.).

Pros and cons of M & M theory:

            One
pro for this theory is it allows for businesses to be ranked based on growth
regardless of what kind of business it is. This can help to show how the
company is doing across different business categories instead of just being
ranked with direct competitors. Another pro is that it assumes that the markets
are all perfect and that the company can trade securities without cost.
Investors would be more willing to invest in a company in a perfect market
because it could trade the security at any time without losing any money in the
process (Investpost.org, n.d.).

            A
con of this theory is that it does not take into account the business income or
how much a company has in debt. Being ranked just on how much a company could
potential grow is not enough to get an accurate ranking on a business. A second
con is that it does not look at the taxes the company will be charged on income
and must pay. Taxes are a part of every business and the interest on debt is cheaper
than paying dividends. The interest on debt can be taken off on taxes but the
interest on dividends is not treated the same (Investpost.org, n.d.).

Draw conclusions of capital structure:

            Understanding
a company’s capital structure can help investors know what company should be
invested in and what companies the investors should avoid. It helps to show how
the company is doing financially and if the company has enough assets to pay
back the debt it has. A company that has a low debt ratio and has high equity
would be a good company to invest in (The Balance, n.d.).

            When
a company has a high debt ratio and low equity it means that the company is not
doing well and may need to look at restructuring the debt to try and make the company
more profitable. This does not mean that the company will file a bankruptcy in
the future but does mean that the company is struggling. It is also important
to take into consideration what the economy is doing when looking at a company’s
balance sheet. Depending on if the country’s economy is on the rise or in a recession
it will affect all the businesses profit (The Balance, n.d.).

Estimate company’s best capital structure:

            After
looking at John Deere’s debt to equity it is clear that this company is doing
well as managing how much debt it has. The company should continue to keep the
debt to equity below 5 or 6 to make sure it looks good to investors and that it
does not run into any issues if there is a year that equipment sales are down. This
company has good sales income but it can be hindered by the economy and how
well crops do for the farmers. The more expensive machinery that the company
sells is to the farmers and if the farmers have a bad year it could reduce the
amount of equipment sold.