Capital Structure And Leverage Case Study
Capital Structure and Leverage (Session 4)
1. Refer to the financial statements of your company for the last five years. Understand and explain the company’s capital structure.
2. Analyze whether the capital structure is optimal.
3. Compare and contrast your company’s cost of capital with that of your competitors or other companies in the same industry. Provide explanation for possible reasons for differences.
4. What difficulties would you anticipate in trying to implement any changes in the capital structure of your company?
• Calculate the WACC at various debt - equity levels, providing unlevered beta and risk free return for your industry (to arrive at the optimal capital structure) • In case your company is debt free, work on the
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This is due to the fact that equity cost more than debt, so increase in debt would reduce WACC. Here in case of AMD vs Intel, Intel has about 80% market share and generates more profits, Intel cost of equity is less than AMD. About 30% of AMD capital is generated from debt. So AMD WACC is more in case of AMD than Intel. So more debt increases the risk with financial outcome of AMD.
Steps to be taken and suggestion:
• AMD was traditionally focusing on Computing (CS) segment as compared to Enterprise, Embedded and Semi-custom (EESC) segment. 2013 2014 2015
CS 90% 70% 60%
EESC 10% 30% 40%
Now AMD is moving away from computing segment and focusing on newer segment as indicated above. The reason for the same is due to slowdown in PC segment.
• Non-GAAP OPEX is down through restructuring, SG&A efficiencies, process tech improvement
• Earlier debt structure as per Oct 2013
Year Debt in Mil Interest rate
2015 580 6 %
2016 -
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• Optimal and minimal required cash balance maintenance Target Minimum (600 Mil) Optimal (1 Bil)
Q1 14 Achieved 982 Mil
Q2 14 Achieved 948 Mil
Q3 14 Achieved 938 Mil
Q4 14 Achieved 1040 Mil
Q1 15 Achieved 906 Mil
So AMD is able to achieve min target cash balance each q-o-q.
Liquidity Need to manage the cash beyond optimal zone
Debt De-risking the debt profile as indicated above
Interest expense reduction
Capital Structure Allocation of excess cash above 1 Bil towards debt reduction
Neural net debt position
Leverage To target optimal leverage ratio (debt / EBITDA) ~2x
So the necessary steps that should be taken to maintain strong financial health status are:
• Hook up to growth & profitable opportunity areas where revenue is maximum such as EESC as described in the beginning. Gain consistent market share and improve the margin.
• Target to achieve consistent ROI on IP investments with disciplined expense structure
• Better working capital structure management and leverage reduction
• To generate consistent free cash
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