FIN 319 – Case #2
This case is focused on capital structure and payout policy. Capital structure is the mix of debt vs. equity the company utilizes to finance its operations and is one of the most important decisions management must make. Capital structure has a direct effect on the value of the firm. Payout policy describes the choices management make regarding distribution of cash to the shareholders to include dividends and share repurchases. For this case you will analyze the current capital structure and payout policies of Columbia Inc. (COLM) and recommend what you believe to be the best structure and payout policy for the firm.
• The first step should be to understand the current capital structure of the company and its associated weighted average cost of capital.
• Review and discuss the benefits and costs associated with including debt in the capital structure.
What are the key considerations the company should evaluate in establishing a capital structure and why are these items relevant to the decision. These could be items related to the nature of the industry or company specific.
• Apply the Weighted Average Cost of Capital technique reviewed in class to calculate the optimal capital structure (please clearly document assumptions). Note: please assume efficient markets, namely market value is equivalent to intrinsic value.
• Summarize and support your specific capital structure recommendation for the company. The recommended capital structure may be different than the calculated optimal level.
• Describe the current payout policy for the company (if any)
• Recommend what you believe to be the most appropriate payout policy for the company. This should include whether you believe the firm should have a payout, amount of payout and form of payout. Please provide supporting evidence for your recommendation.
I am interested in the structured frameworks you use to solve the problem/s, assumptions made, analysis, recommendation and ability to clear communicate. Grading will consider:
• Critical Thinking: Have you formulated meaningful questions (what are the critical issues or problem), synthesized information and financial data, considered alternatives or improvements, proposed position / solutions.
• Analysis: Have you chosen the appropriate analytical framework/s to utilize and appropriately applied them. Assess quality of supporting evidence, key assumptions are identified and a clear recommendation supported by the analysis.
• Communication: The paper must be written clearly with a central message and logical organization. Ideas and recommendations are well supported. The case should contain an executive summary, framing of the problem, analysis, consideration of alternative solutions and recommendation. Please ensure correct spelling, grammar and clear formatting of financial exhibits. Use of tables and charts are often an efficient means to communicate financial information.
Papers should be between 3-5 pages in length plus any exhibits in an appendix.
Items Considered for Grading
Current Payout Description
Test for Excess Cash
Consideration of Theories
Level of payout
Form of payout
Current Capital Structure and WACC
Optimal Structure based on WACC
Cost of Equity
Cost of Debt
Consideration of Theories
Organization & Clarity
Synthesis & Recommendation
Use of Exhibits, Charts