Stock and Capital Structure

Describe briefly Intel’s current capital structure. Discuss whether in your view this capital structure is optimal for Intel, with particular emphasis on the pros and cons of Intel’s substantial cash holdings. Articulate and defend a “target” capital structure for Intel. Cee Capital Structure As shown in the financial income statement (Exhibit3), Intel Corp. (INTC) has a capital structure consisting most of equity.

Intel has very little debt in its capital structure and the cost of debt would have only a marginal effect on the overall cost of capital.The current capital structure of Intel is not optimal yet since optimal capital structure is making minimum weighted-average cost of capital. Portion of Equity and Debt: Long term debt = 363 = 363/4781 = 7. 59% Common Equity =4418 = 4418/4781 = 92. 4 % Cost of Capital: Cost of debt =interest expense/long term debt = 29% Cost of Equity = Since Intel has very large cash balances ($2. 4billion), Intel can decrease WACC by using cash disbursement through the following alternative.

1. ) Market repurchase program 2. ) Issue put warrant When firm repurchases stock, it will reduce amount of shareholder.Therefore it will reduce common equity proportion in B/S. Due to the fact that cost of equity is higher than cost of debt ( you may need to show the calculation ) , Therefore, if the proportion of equity is reduced, it will definitely reduce in WACC.

Issuing the put warrant will have the same result as re purchasing stock, but there will be the risk that company can not buy stock back if Intel price is higher then the exercise price by next two years. Because one who holding put warrant will not find any benefit for exercising warrant ( Not sure na for this comment, but you can show the stock price trend for Intel to say something like Hey. but you can show the stock price trend for Intel to say something like Hey..

SEE ... for trend in next two years stock price is gonna move up then, issue put stock can not garanntee that we can buy stock back ) However, Intel should not diviend payout since it will not reduce amount of stock holding by Shareholder Holding cash Pros Since it faced considerable competitive pressure and also imitations of its products, Intel expected to spend over $700M on research and development. As a result, holding cash would be essential component of the firm strategy.

To develop new products, buy new equipment or expand geographically, firm has to spend money on marketing research, product design, prototype development and so on. Moreover, if a recession hits and the economy start to slow down, Perhaps the most advantageous time to hold cash is when a recession hits and the economy starts to slow down. When that happens you'll be glad you had some money on hand if you lose your job. And if the stock market takes a dive you'll be glad you had some spare cash to buy stocks at bargain prices. Essential component of the firm overall strategy Cons Opportunity cost of holding lot of cash annot find opportunities to deploy capital.

* Precautionary Motive - cash is a relatively safe investment. Cash investments rarely lose value (as can stocks or bonds) and are therefore held for safety reasons in a balanced portfolio. * Asset or Speculative Motive - cash investments provide a return to their holders. cash provides an investor with a way to control risk as well as gain a return on their investment Speculative motive To take advantage of temporary opportunities such as a sudden decline in the price of a raw material or sudden window of opportunity for buying an asset or making an investment.

Precautionary motive To maintain a safety cushion or buffer to meet unexpected cash needs. The more predictable the inflows and outflows of cash for a person / company the less cash that needs to be held for precautionary needs. Cash management involves the efficient collection disbursement and temporary investment of cash. The treasurer’s department of a company is responsible for the company’s cash management system. A cash budget tell us how much cash we are likely to have, when we are likely to have it and for how long.

Thus it serves as the foundation for cash forecasting.