These two Case Studies come from a National Center on Case Studies. I think that a case study approach is very useful in applying knowledge and this is what makes….
The capital structure of Cadbury Schweppes based on its 2006 balance sheet shows that the company uses more debt than equity to finance its operations.
The company’s debt to total stockholders equity ratio of the company is more than fifty percent, while its debt to equity ratio is at 1. 30. A high debt to equity ratio means that the company relies heavily in debt financing. A high debt to equity ratio does not necessarily mean that the company has poor financial leverage because there are industries that are capital intensive which requires companies to incur large amounts of debt to finance its operations.
One such industry is the automobile industry, where a debt to equity ratio of two is still considered acceptable. In the case of Cadbury Schweppes, the company is engaged in manufacturing candy, chocolate and drinks. It is an industry which is not as capital intensive as the car manufacturing industry so its debt to equity ratio maybe too high.
The company has been undergoing changes in its operations over the years. It has gradually moved out of its investments that do not fall within its core business which is confectionery and beverage.
While it disposed of some of its incompatible businesses, it continued to expand its confectionery and beverage operations. These acquisitions, particularly those made in the United States can be the reason for its large debt. Debt is used by the company to increase its operations and, as a consequence, increase its profits. The company’s performance has been increasingly growing every year, so it is possible that the company has determined that the cost of expending the operations which is in the form of interest payments is much lower than the benefits incurred in the form of increase in sales.
Having a large amount of is extremely detrimental to the company if it is unable to recoup the cost of the debt; this is not the case of Cadbury Schweppes. The dividend yield ratio measures the amount of income received by each share of stock with the cost of such share. The dividend yield ratio necessarily varies over time because the market value of share changes as it is traded. A comparison of dividend yield ratio over time can be used to gauge if the performance of the company is improving, but this ratio should not be analyzed on its own.
It must be analyzed together with other factors such as the market value of the share. A company with a low dividend yield can mean that the company’s share is priced highly by the market and does not necessarily mean that the company is unable to make dividend payments. On the other hand, high dividend yield can mean that the company’s share has a very low market value and not because it is able to give its shareholders large amounts of dividends. The company has a dividend yield of 2. 30% and it share has a market value ranging from 51. 5 to 51. 6.
Based on this figures, it is apparent that its dividend yield is not because of the extremely high or low market value of its share. The price/earnings ratio of the company, on the other hand, is seen by investors as a gauge of how much the market values the company’s share. In this company’s case, it has a price earning of 24. 22. This number is very close to the industry’s average. This means that the company is competitive with other members of the industry and is generally viewed by the investing community as a good investment.
Based on its dividend yield and price/earnings ratio, the company is able to compensate stockholders despite its large debts. This is probably because the earnings of the company is divided by a smaller number of shares than if the company chose to finance its operation by equity rather than debt. The large shareholders of the company are Franklin Resources, Inc. and Legal and General with shares ownership amounting to 4. 01% and 3. 47%.