Risks
Internal
In evaluating Nordstrom with regard to a brick-and-mortar expansion of five stores and one fulfillment center in the United Kingdom, requiring approximately $700 million in external funding, various internal risks were identified. The first being Nordstrom’s financial leverage as it stands today, prior to accumulating additional debt with the expansion to acquire new assets. Since 2014, Nordstrom’s financial leverage has grown exponentially, from 3.79 to 8.84, 9.03, and 8.30, in 2015, 2016, and 2017, respectively (“Nordstrom Inc,” n.d.). Subsequently, the amount of debt constructing Nordstrom’s capital structure has grown, indicating weakness, and in terms of borrowing, high interest rates. Consequently, earnings per share for stockholders have been adversely affected. In taking on additional debt to the tune of $700 million, with financial leverage ratios as high as they currently are for Nordstrom, higher interest rates will transpire. Thus, resulting in earnings per share being diluted, and a required increase in retaining earnings. Additionally, looking at Nordstrom’s asset turnover ratio in relation to the retail industry average of 3.62, where every $1 in assets translates to $3.62 in sales, …show more content…
With regard to the present high financial leverage ratio, an increase in long-term debt will elevate the ratio, and subsequently increase the line item of interest expense for the term of the long-term debt. Consequently, diluting earnings per share to stakeholders. Largely, long-term debt financing is the optimal solution for Nordstrom, opposed to equity financing, as it is quicker to obtain. Furthermore, Nordstrom is projected to achieve $20 billion in sales by 2020 and continue growing thereafter; overall, debt financing would cost less than equity financing in the long-term (“2016 Annual Report,”
Internal
In evaluating Nordstrom with regard to a brick-and-mortar expansion of five stores and one fulfillment center in the United Kingdom, requiring approximately $700 million in external funding, various internal risks were identified. The first being Nordstrom’s financial leverage as it stands today, prior to accumulating additional debt with the expansion to acquire new assets. Since 2014, Nordstrom’s financial leverage has grown exponentially, from 3.79 to 8.84, 9.03, and 8.30, in 2015, 2016, and 2017, respectively (“Nordstrom Inc,” n.d.). Subsequently, the amount of debt constructing Nordstrom’s capital structure has grown, indicating weakness, and in terms of borrowing, high interest rates. Consequently, earnings per share for stockholders have been adversely affected. In taking on additional debt to the tune of $700 million, with financial leverage ratios as high as they currently are for Nordstrom, higher interest rates will transpire. Thus, resulting in earnings per share being diluted, and a required increase in retaining earnings. Additionally, looking at Nordstrom’s asset turnover ratio in relation to the retail industry average of 3.62, where every $1 in assets translates to $3.62 in sales, …show more content…
With regard to the present high financial leverage ratio, an increase in long-term debt will elevate the ratio, and subsequently increase the line item of interest expense for the term of the long-term debt. Consequently, diluting earnings per share to stakeholders. Largely, long-term debt financing is the optimal solution for Nordstrom, opposed to equity financing, as it is quicker to obtain. Furthermore, Nordstrom is projected to achieve $20 billion in sales by 2020 and continue growing thereafter; overall, debt financing would cost less than equity financing in the long-term (“2016 Annual Report,”