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This paper seeks to find ways where to get the $675 million for Intel. I will also discuss the specific amount to be raised from each source and I will attempt give a justification for both my naming of source of financing and the amount I intend to raise from each source, if such be the case. The discussions and analyses should be geared in having a proper balancing of debt to equity. 2. Analysis and Discussion The case facts Intel Corporation, known as the computer chip is facing a problem of having to finance cost of shipped products which are found defective.

In its shipments of product starting last November, the company had shipped nearly a million defective motherboards for personal computers. For need of recall, it expected that it will cost it will cost the company hundreds of millions of dollars. Intel company’s current financial statements of Iintel Co. in the 1999 Annual Report to Shareholders, showed total assets of US$ 43,849. 00 million, total liabilities of US $ 11,314. 00 million USD , and a total stockholders’ equity of US $32,535. 00 . ( See Appendix A).

The case instructs us to assume the following: Recall of the products will involve costs of for notification of purchasers, remanufacture of the motherboards, shipping of replacement inventory, labor for parts replacement, `goodwill` payments to purchasers, and regulatory reporting on the recall. Although Intel appears to downplay the total cost, the best internal estimate is that this error will cost Intel approximately $725 million. The case instructs that this cost will be incurred in the second quarter of 2000. Another given assumption is that Intel will need to raise $675 million in additional cash to service this recall.

Further it is an assumed that the current cash, accounts receivables, and current investments (current assets as per Balance Sheet) are committed to either current operations or other mandatory projects. 2. 2 Analysis and Discussion of Issue 2. 2. 1 What should Intel do to raise the $ 675 million additional cash while still attaining a balanced debt to equity ratio? To balance debt to equity is must be presumed to be beneficial to the company. The questions are how to balance debt to equity? Debt to equity at a certain level, it could either be advantageous or disadvantageous to the company.

A highly leveraged firm is possible if Debt to equity level is outside industry benchmark. It means then that investing with the company is risky. On the other had it to good but very far from average debt to equity, the company might not operating under maximum stock price assumption. There is therefore a trade-off return and risk that will determine whether a company is highly leveraged or not. It is therefore not proper to just borrow then finance the need because the relation of risk and return trade off the company could not just borrow and borrow to finance its needs of 675 million arising warranty liabilities for defective shipments.

It could therefore imply that if the source of financing is purely from creditors the debt to equity ratio will get higher leveraged until it becomes too dangerous or not encouraging for the company. At the other side of the coin, financing the source could come purely from additional stocks to be issued with the same the debt to equity ratio. To illustrate, let us first determine the ideal debt to equity ratio of Intel by getting industry average. The industry average would mean that such debt to equity is the one that characterized the industry under the normal course of event.

Industry average then indicates that such is the presently approved by the most of the creditors. Higher than the average ratio, creditors would be more reluctant to finance the company’s need for funds. By logical analysis, Intel could go bankrupt if it could not borrow in case of emergency. If such is the case, the presumption is that in case of emergency needs of the company, Intel could not run to banks to barrow because of high debt to equity. The consequence of its failure to have the funds as when required is a problem of working capital.

Bankruptcy could ensue if the company cannot meet its current liabilities. Bankruptcy in turn could result to stopping business operation. Computing the industry average Yahoo Finance yields debt to equity of 0. 11. Given this figure, the company should know that resorting further or borrowing could endanger the company in a more risky and greater the risks may drive investors away from the company. As computed debt to equity ratio declined from 0. 35 to 0. 38. (See computation, Appendix A).

Resorting to pure investment from stockholders, the company expects its stockholders to make additional investment, which may be also very remote on the premise that the stockholders are unready to invest or to reinvest their earnings. If reinvestment is pursued or resorted by stockholders in the form of stock dividend, debt to equity will remain at 1999 debt to equity level of 0. 35. (See Appendix A) Reduced in simple terms, resorting to borrowing is not be applicable to the company because the debt to equity would deteriorate by getting a bigger gap from the industry average, remaining at 0.11

Conclusion:

Our observation confirms that balancing debt to equity is paramount both long term and short tem health of the Intel. We also learned that there is a limit to one company’s borrowing since creditors could just say “no” if there is a point where it is already critical to the company especially if it cannot compel its owners or stockholders to invest without delay. It must balance its act buy looking at industry average. By looking at industry average, it will have a guide that will set the proper amount to be borrowed.

3. 2 Recommendation: Since Intel is just too liquid to have the 675 million USD via reinvestment in the form of stock dividend. By so doing debt to equity ratio at year end would still be balance. There is a net advantage of resorting to stock dividend by 0. 03 differences in debt to equity ratio. (See Appendix A)

References: 1. Yahoo Finance, Industry browser, 2006, {www document} URL http://biz. yahoo. com/p/830conameu. html, accessed August 4, 2006 2. Intel, Dividend Summary, 2006{www document} URL