Business and Management
Refer to the most recent balance sheet of United Parcel Service (UPS). Review the “liabilities and equity side” of the balance sheet.
(a) Short-term liabilities (or debt) and long-term liabilities
Find out from the balance sheet of the company the total of the short-term liabilities (also called “short-term debt”) and long-term liabilities (also called “long-term debt”).
The market value of equity is by definition equal to the number of shares outstanding times the market price per share. Find out the number of shares outstanding and the recent price per share. Then multiply one by the other in order to find the market value of equity of your company. If you have a problem finding out the number of shares outstanding, you may go to http://finance.google.com and insert the name of your company. The market value of equity of your company is what is called “Mkt Cap,” or market capitalization. An alternative site is http://finance.yahoo.com where you may insert your company’s name and get the market capitalization.
Once you have this information, prepare a 3-page paper with the following:
1) Compute the debt ratio of your company (total liabilities divided by the total liabilities plus equity) and the debt-to-equity ratio (total liabilities divided by total equity). Show these two ratios for short-term liabilities only and for long-term liabilities only (instead of total liabilities, use just short-term liabilities and long-term liabilities). Show all of your work and calculations.
2) Give your recommendations as to whether or not you consider these ratios to be too small or too large. Should your SLP company increase its debt or take steps to pay off its debt?
3) Compute the debt-to-equity ratios for two other companies in the same industry as your SLP company. Which of these three companies has the highest debt-to-equity ratio, and why do you think it chose to have a relatively high ratio? Which of these three companies has the lowest debt-to-equity ratio, and why do you think it chose to have a relatively lower ratio?
4) What do you perceive you have learned from this assignment? Which of the following learning outcomes do you feel you have mastered and why?
• Identify and discuss the concept of optimal capital structure.
• Discuss the advantages and disadvantages of debt financing and of equity financing.
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