Competition Bikes, Inc.Financial AnalysisJET2 Task 3

Introduction Competition Bikes, Incorporated (CBI) has decided to weigh their options for expansion into Canada by either acquiring or merging with Canadian Bikes, Inc. This report will discuss the proposed expansion and make recommendations based on the company's capital structure. Capital structure can be described as how a business finances its assets. There are two main types of capital: Equity and debt. Capital structure is usually a mix of debt, preferred stock, and common stock that the company can use for expansion and to remain financially healthy. The key is to choose the right mix in order to maximize shareholder return. A1. Capital Structure

Capital structure is generally defined as how a company finances its assets. It is measured as a percentage of debt and equity (common and preferred stock). Potential investors tend to look positively on a company that has more equity and less debt. The best capital structure approach for CBI to take is to implement the 50% Preferred and 50% Common Stock scenario. This alternative provides the best overall way to improve CBI's financial position with strong capital structure while maximizing shareholder return. A1a. A review of Canadian Bikes data over five years indicates consistently increased earnings before interest and taxes (EBIT), increased net profit, and increased shareholder returns (EPS). Offering the 50% preferred and 50% common stock results in the highest EPS for years one, two, and five and equal to the next alternative (20% with 9%bond) in years three and four. Net income is higher despite increased income taxes for all five years as is the EBIT. Because this option offers 50% preferred stock at 5%, $50 par, the total income available for Common stock and common stock shares outstanding is less than the other options. The mix of common