Capital structure theory, issues and debates while showing how capital Research Paper

Capital structure theory, issues and debates while showing how capital structre choices affects a firms return on investment (RO - Research Paper Example In this portion, the MM approach for the capital structure theory has been described, and the assumptions have been stated and criticized. The main objective of this project is to show the importance of the capital structure of a company and its affect on the performance. A detailed analysis of the debt and equity financing has been done in this project from 2010 to 2012. Their implications have been discussed. In this project, it has also been shown how the capital structure of a company determines the business risk. Table of Contents Table of Contents 3 Introduction 4 Business and Financial Risks 5 Business Risks 5 Financial Risks 5 Modigilani and Miller’s Capital Structure Theory 6 Capital Structure Evidence and Implications 7 Optimal Capital Structure for the Company 9 Conclusion 11 References 12 Appendices 13 Introduction Coca Cola is a multinational beverage manufacturer, marketer and retailer of non-alcoholic beverages (Coca Cola, 2013a). It has its headquarters in Atla nta, Georgia. It was established in 1886 by John Pemberton who was a pharmacist in Columbus, Georgia (Coca Cola, 2013b). Initially the beverage was sold for 5 cents each glass at Jacob’s Pharmacy and regularly nine glasses were purchased. John Pemberton died within two years and after that the brand was bought by Asa Candler in 1889 (Coca Cola, 2013c). From 1900 to 1920, the company expanded to a great extent. Robert Woodruff was appointed as the President of the company just four years after it has been bought by his father from Asa Candler. He remained in that position for a period of more than sixty years. From 1950 to 1960, the company introduced different flavors of juices in its product line. Presently the company serves in most of the remote areas of the globe and has more than five hundred different drinking brands. The company is currently financing its operations with higher dependency on debt capital. There are various factors that affect the capital structure of t he company. It needs to be financially flexible in order to adapt to the changes in the existing market. The financial performance of the company has improved significantly. The company is enjoying tax benefits because of the high debt financing. Thus, the tax position of the company is good. There are various other business risks which are reducing its growth opportunities. Business and Financial Risks The company has some risks which pose a threat to the projection of growth. Business Risks Changes in the Customer Preferences Presently, it has been observed that the customer’s preferences for non-alcoholic drinks have changed due to various health concerns, changes in their lifestyle and also the pressure from the competitive products in the market. The company should try to adapt to the changes with the current market conditions in order to lead the market and also to reach to other areas which have not been explored. Increase in Competition Among all the leading beverage manufacturing companies, PepsiCo is the major competitor of Coca Cola. There is also an increased competition from different beer manufacturing companies which provide various non-alcoholic products. Thus, Coca Cola is facing a threat from the strong competitors in the market. Financial Risks Fluctuations in Foreign Exchange Rates The company incurs liabilities in different currencies apart from that of dollar. The changes