Task: 3 A. Prepare a summary report in which you do the following:

A1. Recommend a capital structure approach that maximizes shareholder return.

Capital Structure: “Capital structure is the manner in which a firm’s assets are financed; that is, the right-hand side of the balance sheet. Capital structure is normally expressed as the percentage of each type of capital used by the firm debt, preferred stock, and common equity.” (Capital Structure Decision, 2002)

Capital structure is a mix of debt, preferred stock, and common stock to which
Competitive Bikes will plan to finance its company. The recommendation for Competition Bikes pertaining to their capital structure is the alternative of 50% Preferred and 50% Common Stock. With reviewing the numbers and the EPS as outlined in the schedule below (exhibit 3-1) this is the best alternative to strengthen Competition Bike financial position with strong capital structure while maximizing shareholders’ value. Although a solid capital structure will maximize a shareholders value and increase the value of the company, it is also important to Competition Bikes as with any other business, is not to lose site and focus on what is also important to the consumer; which is the quality of the product and customer service.

There are two component of total capital which needs to be analysis; debt capital and equity capital. Ø Debt Capital: Is long term debt such as bank loans; Debt Capital is typically more expensive form of equity therefore are compensated with a greater return. Ø Equity Capital: Stockholders’ Equity: Shareholder with equity capital take greater risk Preferred Stock Common Stock Equity (Gitman, 2008)

Exhibit 3-1

A1a. Justify your recommendation. Ø 50% Preferred and 50% Common Stock, has the highest EPS for the first three years and