Capital structure

Capital structure is extremely significant to the company because is influence company returns for its investors but also influence companies stage if it is able to survive recession. According to it the company should decide wisely how much they are able to have debt and also how much they can send on equity. The market value of the firm regulates if debt holders are able to get their money back. Therefore investors are analyzing debt proportion of the total market value of the firm.

According to the trade off theory, company seeking for the best structure of capital and also to check all benefits they can achieve avoiding drawbacks of any extra debt.

“ the advantages of this approach include interest payments being deductible from company tax (Modigliani and Miller 1963; DeAngelo and Masulis). Additionally it can be reduced problem with cash flow ( Jensen 1986; Stulz 1990). The drawbacks of debt including the possible cost of financial distress ( Kraus and Lizenberger 1973; Kim 1978) and also agency cost arising between owners and financial creditors( Jensen and Meckling 1976, Myers 1977). Benefits and drawbacks of company debt balance each other therefore company can achieve equilibrium. Myers(1884) proofed that trade off theory implied the rate of real company indebtedness reverting to a optimum level. “⁴

To analyze capital structure how much debt both companies having we used Debt/Equity ratio. Ratio calculation, for the last five years of both companies Mulberry Group Plc. And also Ted Baker Plc. is provided below in the tables:

Mulberry Group Plc. 5

Ratio Formula	2015	2014	2013	2012	2011
Debt/equity

From the table above for this analysis we could tell that Mulberry group Plc. debt increased dramatically in 2012 from 2011 with figure 40841m. It could be reason that Mulberry group plc. sales fail by 22% in 2012. Gofrey Davis, chairman stated that the main reason of sales slowdown come from the outlet stores which ones purely used stock to clear.⁶ Although from the 2013 debt of the company slowly start to reduce year after another it can be seen from the table. Additionally shareholders equity from 2012 increasing every year so from this analysis we can tell that company don’t have any loss and is doing well therefore the shareholders are invested successfully.

Ted Baker Plc.

Ratio Formula	2015	2014	2013	2012	2011
Debt/equity

Additionally from the table above we could compare the results of another company Ted Baker Plc. by using same Debt/Equity ratio how the firm deal with its debts of five years intervals. From the table clearly can be seen that Ted Baker Plc. debts are increasing from 2011 until 2015 year by year. Because the company performs well and the business grows rapidly it should increase borrowings therefore it is required to fund capital expenditure to support they long-term strategy.⁷ Although even Ted Baker Plc. Have some debts the company is able to pay back because company’s performance well every year and a profit goes up. From the company’s report can be seen that group revenue from 2014 321.9m has increased by 20.4% to 387.6m in 2015.⁸

High-growth companies always-seeking finance from the earnings reserves rather of using debt. Therefore company with high debt usually is with low cash reserves and could be in high risk of failure. Therefore concentrating on pecking order theory to analyze what choice of finance both companies would prefer. The pecking theory usually begins asymmetric information that means that managers have better knowledge about companies’ values and risks then investors from outside. Asymmetric information outcomes what choice company make between internal and external financing and also about new debt and equity guarantees.

The Mulberry Group Plc. even company has big loss in 2015, (1.4m) and the profit in 2014 was 8.6m.⁹ Even company has a huge loss they had no borrowings outstanding. The company has bank overdraft which they are able to repay back depend on they demand. Mulberry Group Plc. Prefers to use its internal financing or company using only short time period debt information could be find in Financial Times company’s balance sheet.¹⁰

Both companies are without long time borrowings and having only short time debt. According pecking order that more profitable firms are mostly borrowing less because they are not in need outside money although less profitable company because they are not holding enough internal finance. The theory forecasts that debt is decreasing from internally generated cash and if the company will need external finance debt will react positively. Some company’s need to issue new equity to receive internal finance therefore Mulberry Group Plc. in 2014 have issued new additional shares of 5p(59997458)¹¹. Company like Mulberry Group Plc. which business selling luxury leather goods it reliant on the world’s economy therefore company issue additional investment.