Abu Dhabi Diversified Holdings, Inc. has $400 in total assets, $10 million in note payable, and...

Abu Dhabi Diversified Holdings, Inc. has $400 in total assets, $10 million in note payable, and $50 million in long-term debt.

[a] Explain the importance of a company’s capital structure.

[b] What is the debt ratio of Abu Dhabi Diversified Holdings.

[c] Based on the capital structure of Abu Dhabi Diversified Holdings, how would you advise the company to finance its aggressive expansion plans.

Expert Solution

a. Capital structure refers to the mix of a company's capitalisation. That is a
a mix of long term sources of funds such as debentures,
preference share capital, equity share capital and retained
earnings. It is for meeting the total capital requirement.

While choosing
a suitable Capital structure various factors need to be taken into consideration like cost, risk,
control, flexibility and other considerations like nature of
industry, competition in the industry etc.

The decision in relation to the financing of firms assets is very crucial in every business. The financial manager is often in a dilemma to choose the optimum portion of debt and equity.

Importance of optimal capital structure is
1. Value maximization of the company.
2. Cost minimization.
3. Growth of the company increases.
4. Increase in the share price.

b. Total Debt = notes payable+long term debt.
=10+50
=60

Total assets 400

Debt ratio = 60/400 = 0.15

c. Optimal debt ratio is considered as 0.5, so to reach an optimal debt ratio, the diversified holdings should finance its aggressive expansion plan through debt financing.

jeff jeffy answered 4 months ago

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