The high level of debt must be reduced but due to the financial distress the company is facing most options are not feasible They should hedge their foreign currencies used in their global operations so to reduce the exchange rate risk they are currently facing Hypothetically the best option would be to reduce debt by paying the bank borrowings.
Especially their short-term debt in order to ease operations and reduce liquidity risk They could also issue more equity in order to improve their DIE ratio and therefore seem more solvent to the market players Q: Describe briefly Massey capital structure in 1976.
In your view, is this a good capital structure for Massey? ; Massey capital structure: debt (40% SST, LTD) to 40% equity. ; Far from optimal structure as Massey was financed by too much debt and also too much of it was short term.
Even worse when taking into account the multiple risks of its business Reason: debt cheaper than equity, tax savings and helped Massey achieve the objective of rapid growth and gain world market share (really successful up to 1976).
However, this resulted in more risky equity and financial distress in the end ; Mackey’s financial strategy during 1 976 had higher financial leverage than its competitors.
Observable from all liquidity ratios, especially coverage ratio ; During Mackey’s good times, because of all the involved risks and the capital intensiveness of the industry, Massey should have taken advantage of its healthy financial position and issue more equity instead of debt, which would have been closer to its optimal capital structure.