Answer to Question #289878 in Management for Zeinab Zoayter

Question

Part a (1,000 words)

Critically evaluate the capital structure of your chosen organisation and discuss whether this capital structure is aligned to the organisation’s strategic goals. For example, does your organisation have a greater degree of debt or equity (or its equivalent in the case of not for profit or public sector organisations) and how does this impact upon the gearing of the organisation? You should also consider how the organisation views risk and return (or its equivalent in the case of not for profit or public sector organisations).

Answer 1

Honda Motors

Capital Structure refers to firm's finances in terms of balance between the equity and debts. Finances are meant to take care of a business' operations such as rent, purchasing of inventory , renumeration to employees among other expenses. Honda company, an automotive industry headquarted in South Korea, had $1,500,000 in assets and $500,000 in liabilities. The company's equity is therefore at $10,000,000.

This structure is aligned with Honda's goals. What the managers laid down is exactly what Honda has as it's capital ratio. The company's policy is that for every $5 of debt, there is $1 in equity. This is achieved from the capital information above. The company's capital goals is to have a low risk equity capital structured company. 

This capital structure has actually assisted Honda in its needs to increase its returns to be able to finance its debt. It also makes the company being perceived a lesser risk company to future lenders. This places the company at a place better to get financed by financiers since it stands at a position to repay loans without struggles. Honda is a risk taking company. It invests heavily on research and introduction of newer models to the market. It head produced in large quantities different models such as Honda Stream, Hybrid, Fit among others. Honda has also ventured in manufacture of luxury private jets in large quantities hoping to reap big returns.