JET2 Task 3

A.
Competition Bikes, Inc. (CBI) currently finds itself in a position in which it can feasibly expand its business. As such, the company has identified Canada as a potential market into which it may expand and has further identified Canadian Biking, Inc. (CABI) as a potential avenue of expansion. Specifically, CBI is investigating whether it should merge with CABI or instead purchase the company. This report will analyze the company’s various options with regard to such an expansion and will ultimately make a recommendation as to whether merger or acquisition of CABI would be best for CBI.
A1.
Capital structure refers to the money being utilized within a company, and it is divided into two types of capital: debt capital and equity capital (Kennon, 2013). Debt capital refers to the percentage of the company’s capital that is borrowed, while equity capital is money provided by the company’s shareholders (Kennon, 2013). Furthermore, equity capital is represented in two types: retained earnings and contributed capital. The latter, contributed capital is the money that was originally put forth to fund the company (Kennon, 2013). These funds were provided in exchange for stakes in the company’s ownership. Retained earnings refer to the profits that have been earned and collected from previous years and put aside to be used by the company for expansion (Kennon, 2013). As CBI looks to expand into the Canadian market, it must first determine which capital structure is best for the company. In making this decision, the company must identify which combination of debt and equity will provide the company with the least expensive capital. In determining this, CBI must review the projected amounts paid toward interest, common stock shareholders and preferred stock shareholders while also evaluating each option’s projected net income and earnings per common