Debt Structure of Intel
Intel is one of the largest companies supplying computer chips, semiconductors and peripherals to the computing industry. It is also a very well managed organization both operationally and financially. This activity will discuss the capital position of the company and its capital structure. The glance at the ratios in the table below tells us about the capital structure condition of the company.
The above table clearly shows that the company is more geared as compared to the industry average. In other words, the company has more debt as compared to the industry. This also means that the company will have to more in interest expenses which will decrease its profitability. The company is using its debt in buying fixed assets. It is a good move by the company as these assets can be used in the future to generate more income and profitability, and at the same time they can be used to obtain more debt in the times of need. However, one sign of worry is the very low value of company in terms of its EBITDA. The company should try to improve it by investing into more profitable venture. Similarly, the tax rate of company is very high as compared to the market average. The company can use this high tax rate as shield against its debt. In other words, due to high cost of taxes, the company’s effective debt cost will be low. This may be one reason why the company has obtained such a huge debt.
FRICT ANALYSIS:
The company is currently highly geared which means that in future, its flexibility to raise capital will be limited to either high priced debt, or it will have to tempt the investors by offering them shares at a discount, or should pay a higher level of dividend in the future years. The current structure is not flexible. If the company has enough cash it should pay off some of its liabilities to improve its flexibility and room to maneuver cheaper sources of funds in the times of need.
The current debt structure poses no risk due to the strong financial condition of the company. IT can easily meet its financial obligation and hence the risk of financing is very low. In future, if the demand plummets and profits fall, and the company business does not generate enough cash flow then the company will be in trouble because debt is a fixed obligation that has to be paid whether the company makes a profit or loss.
Similarly, the company can use more source of debt to increase its income and thereby increasing its earnings per share. This means that the company is in safe position and can enjoy a better position in the future.
The control factor of the company is also good, as most of the financing is through debt, and the company does not risk losing control by offering too much shares in the market.
The timing of company’s debt is also very safe because there are no upcoming obligations and future looks very safe for the company, and its structure is quite close to the optimal.
MM THEORY OF CAPITAL STRUCTURE:
Since the company has a higher debt percentage therefore future debt holders and shareholders of the company are going to ask for a higher return. This is because debt holders have first claim on the income of the company before any shareholders or tax authorities are paid. Since the company’s debt ratio is extremely high, the shareholders are demanding a higher dividend because of the risk factor of having a second claim on the profits of the company.
PECKING ORDER THEORY:
Pecking order theory suggests that since the managers and the employees of the company has more information about the company, they will base their decisions on the knowledge information available to them. Due to high debt of the company, the company will try obtain new funds either through internal sources or by issuing new shares.
