The Capital structure decision and the cost of capital Essay

Google Inc is one of the most successful companies that has risen from a new business in the 1990s to one of the largest multinational corporations today. At the same time, the company needs to improve constantly its financial performance to maintain its competitive position and to enhance its position in the market. In such a situation, the financial position is extremely important for its steady development. In this regard, the company should pay a particular attention to its debt ratio and its debt to equity ratio because they reveal the extent to which the company is flexible in borrowing money and therefore the extent to which the company has the potential to grow using borrowed capital. At the same time, these ratios are crucial for the understanding of the current financial position of the company and development of both short-run and long-run strategies of its development.
On analyzing the debt ratio of Google Inc. it is necessary to use the following formula to define the company’s debt ratio: Debt ratio = total liabilities / total liabilities + equity = 12,870.00 / 12,870.00 + 51,991.00 = 12,870.00 / 64,861/00 = 0,198. Therefore, the debt ratio of Google Inc. is 0,198.
As for the debt to equity ratio, it is defined with the help of the following formula: Debt to equity ratio = total liabilities / total equity = 12,870.00 / 51,991.00 = 0,247. Hence, the debt to equity ratio of Google Inc is 0.247.
Basically, the debt ratio and debt to equity ratio of Google Inc. are relatively low that means that the company has the potential to borrow money and to increase its liabilities. In such a situation, it is possible to recommend Google Inc to carry on its current policy and probably to increase its debt ratio because there is still the wide gap between the company’s debt and its equity. Therefore, the company can borrow money to accelerate its financial and marketing performance.
At this point, it is possible to refer to the position of its rivals, such as Yahoo and Microsoft. In this regard, it is worth mentioning the fact that the debt ratio for Yahoo is as follows: Debt ratio for Yahoo = total liabilities / total liabilities + equity = 2,048.70 / 2,048.70 + 12,758.78 = 2,048.70 / 14,807.48 = 0,138
The debt to equity ratio for Yahoo is as follows: Debt to equity ratio for Yahoo = total liabilities / total equity = 2,048.70 / 12,758.78 = 0,161
As for Microsoft, its debt ratio is as follows: Debt ratio for Microsoft = total liabilities / total liabilities + equity = 51,621.00 / 51,621.00 + 57,083.00 = 51,621.00 / 108,704 = 0,475. The debt to equity of Microsoft is as follows: Debt to equity ratio for Microsoft = total liabilities / total equity = 51,621.00 / 57,083.00 = 0,904.
Thus, Yahoo and Google have consistently lower debt ratio and debt to equity ratio compared to Microsoft. In fact, Yahoo has the lowest debt and debt to equity ratio. This policy is favorable for the accelerated growth of the company because Yahoo can increase its debt and get funding of its new projects. In contrast, Microsoft is limited in its borrowing ability because it has to reduce its liabilities substantially. Otherwise, the company is likely to face a substantial financial crisis. In such a say, the low debt ratio and debt to equity ratio provide organizations with larger opportunities for their business development.