Week 3 Capital Structure
Capital Structure
(see Amalgamated Hat Rack’s balance sheet for Dec 31, 2016 below)
| 2015 | 2016 | |||
| Assets | ||||
| Cash and marketable securities | $355,000 | $430,000 | ||
| Accounts receivable | $555,000 | $512,000 | ||
| Inventory | $835,000 | $755,000 | ||
| Prepaid expresses | $123,000 | $98,000 | ||
| Total current assets | $1,868,000 | $1,795,000 | ||
| Gross property, plant, and equipment | $2,100,000 | $1,900,000 | ||
| Less: accumulated depreciation | $333,000 | $234,000 | ||
| Net property, plant, and equipment | $1,767,000 | $1,666,000 | ||
| Total assets | $3,635,000 | $3,461,000 | ||
| Liabilities and Owner's Equity | ||||
| Accounts payable | $450,000 | $430,000 | ||
| Accrued expenses | $98,000 | $77,000 | ||
| Income tax payable | $17,000 | $9,000 | ||
| Short-term dept | $435,000 | $500,000 | ||
| Total current liabilities | $1,000,000 | $1,016,000 | ||
| Long-term dept | $750,000 | $660,000 | ||
| Total liabilities | $1,750,000 | $1,676,000 | ||
| Contributed capital | $900,000 | $850,000 | ||
| Retained earnings | $985,000 | $935,000 | ||
| Total owner's equity | $1,885,000 | $1,785,000 | ||
| Total liabilities and owner's equity | $3,635,000 | $3,461,000 | ||
Table: Amalgamated Hat Rack Balance Sheet as of December 31, 2016 Updated
Reference: Adapted from Finance for Managers, Harvard Business Essentials (2002). Updated
Remember at the beginning of the Week 2 lesson we pointed out that that all assets are claimed:
Assets = Claims
Which is the same as:
Assets = Liabilities + Equity
The terms on the right hand side of the equation, which represent the claims on the company’s assets by those who put up the money to pay for them, are together referred to as the Capital Structure of the company. A company’s capital structure is most often expressed as the percentage of debt and equity financing present. According to this custom, Amalgamated Hat Rack’s capital structure would be calculated as follows:
Amalgamated Hat Rack Capital Structure as of Dec 31, 2016:
| Total Liabilities: | $1,676,000 | 48% |
| Total Owner's Equity: | $1,785,000 | 52% |
| Total Financing: | $3,461,000 | 100% |
Amalgamated Hat Rack’s capital structure at the end of 2016 would, therefore, be said to be 48% debt and 52% equity. When financial analysts look at a company’s capital structure they frequently break out the liabilities into their major components and display the results on a pie chart. This enables them to tell at a glance where the company’s financing is coming from. The analysis for Amalgamated Hat Rack would look like this:
| Year-end FY 2016 | |||
| Capital Structure: | |||
| Accounts Payable | $ 430,000 | ||
| Short-Term Debt | 500,000 | ||
| Other Current Liabilities | 86,000 | ||
| Long-Term Debt | 660,000 | ||
| Qwner's Equity | 1,785,000 | ||
| Total: | $3,461,000 | ||
Hat Rack Capital Structure.pdf Download Hat Rack Capital Structure.pdf
Looking at the chart, you can see that at the end of 2016 Amalgamated was financing just under half of its assets with debt and the remainder from equity sources (ie, the firm’s owners). Within the liability category accounts payable (that is, buying supplies on credit) was the source of about 12% of financing, short-term debt about 14%, and long term debt about 19%. This is not unusual for a manufacturing company.