Autozone Inc. (Corporate Finance Strategies) Harvard Case Solution & Analysis

Analysis of Alternative Solution

The alternatives are developed on thorough understanding of the entity problems with analyzing their respect to their industry’s practical exposure and the industry environment with respect to the competitors. It develops three broad alternatives under which sub-alternatives are also covered. The sub-alternative relates to the organic growth and growth acquisition by the existing company. . The following are the alternative suggested for the company:

  1. Increase the debt element to the limit of forty percent of capital structure with looking after credit rating category and operating cash flow use as for repurchasing
  2. The Second alternative, is to maintain the Repurchasing of shares with acquisition of similar stores by operating cash flow with payment of the dividend
  3. Last alternative is to maintain the capital structure with the ratio of 40:60 percent of debt and equity respectively by retaining the investors` confident about the enterprise value and its position in terms of returns.

Pros and Cons of Each alternatives

Each alternative shows has its pros and consregarding financing and its maintenance of the capital structure. The second option relating to the repurchase shares through operating cash flow would be more feasible for the company in maintaining the enterprise position in the marker and the industry. It would help in the cash dividend because it is indirect dividend for the company. In this alternative, it could increase the debt element by eliminating the previous debt instrument in the company under the limitation of the forty percent of debt in the capital structure. There is one more option with second alternatives that it can distribute cash dividend by increasing the number of new stores through operating cash flows.  In the first alternative, it shows the repurchasing of shares by their net earnings of the company that would result in reducing the earning per shares but increase in return on invested capital on huge notes.  The last alternative is the universally best for the company as traditional approach of the capital structure in the financial management. The company should follow this alternative for stabilizing the capital leverage of the company. Some cons of this alternative are not supporting the return parameters which are the investment capital and equity returns. Out of these alternatives the best option is utilizing operating cash flows for repurchasing of the shares. It would be beneficial in the cost and returns of the company as well as stable the position of the capital structure of the entity. Organic growth could be covered in the second alternatives.

Criteria for analysis

The criterion of the analysis belongs to the certain financial tools in order to recognize the value for repurchase of the share programs. It is important to understand the financial ratios of the company to estimate the current values of the entity. The following ratios are given below:

  • Return on total Assets
  • Return on Equity
  • Price Earnings Ratios
  • Earnings Per  Shares
  • Return on invested Capital

These ratios are mentioned in the Exhibits 1from the year to 2007 to 2011 as mentioned data in the case.

Recommendation

The recommended analysis, shows the effect of determining the company`s operating cash flows that would be essential for the repurchasing of the shares. The reason that the market estimates the repurchase of the share is considered as an indirect dividend to the enterprise. The organization is improving the share price through the repurchasing of the shares events. If they prevent the repurchasing of the shares then it would give anegative signal tothe market. This is the reason that, the investors are losing theirconfidence over the company. If the enterprise would like to issue cash dividend then it has to maintain it on the constant rate because the nature of dividend is tacky or it has to increase the satisfaction level of the investors in the company.

The enterprise has verified itsperformance of previous repurchasing events that has improved the return on invested capital which is the main driver for increasing the share price in the market. The alternatives of the options which relates to the operating cash flow by acquisition would be an additional benefit for the company which has linked with the retail business of the company. This would increase the current returns of the enterprise. For the benefits, the company has to retire its old debts and initiate new ones debts with its limitation near to forty percent as per the traditional theory of the financial management. This would also help in the better credit rating of the company and also increase the enterprise stock values in the market with its financial sentiments....................................

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