CAPITAL STRUCTURE AND THE COST OF CAPITAL External ...

Debt financing in parallel universes: Toy Inc. and all-equity Toy Inc. side by side
A cursory inspection of Toy Inc. and all-equity Toy Inc. shows very similar tendencies in financial ratios and cash flows. To
get a more revealing picture we need to analyze them side by side. We start with their current standing and we see that most
differences are rather subtle (except for the differences due to the lack of leverage, that is). All-equity Toy Inc. has a slightly
higher profit margin and return on assets (no interest payments to reduce earnings), yet it boasts a lower return on equity.
Cash flow to shareholders is higher for all-equity Toy Inc., yet, total cash flow is higher for Toy Inc. This is so because total
cash flow of all-equity Toy Inc. is made only of dividend payments, while that of Toy Inc. is made of dividend payments
and interest payments.
Parallel universes: Toy Inc. and all-equity Toy Inc.
All equity Toy Inc.
Toy Inc.
Sales $5,000 $5,000
Net income $330 $276.71
Dividend $115.50 $96.85
Total assets $3,500 $3,500
TAT 1.43 1.43
FAT 2.50 2.50
D/E 0.00 1.69
Total debt ratio 0.00 0.63
LT debt ratio 0.00 0.43
TIE 0.00 6.19
Cash coverage 0.00 18.58
Profit margin 6.60% 5.53%
ROA 9.43% 7.91%
ROE 9.43% 21.29%
Dividend per share $1.16 $0.97
EPS $3.30 $2.77
Book value per share $35.00 $13.00
Dividend yield ? 3.87%
CF to creditors $0.00 $80.75
CF to shareholders $115.50 $96.85
CF from assets $115.50 $177.60
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