Discuss about the Implications For Capital Structure And Debt Pricing.
|
Particulars |
2017 |
2016 |
2015 |
|
Long Term Debt |
2,175,000 |
1,011,000 |
1,321,000 |
|
Percent Debt |
29% |
22% |
27% |
|
Share Equity |
5,440,000 |
3,506,000 |
3,524,000 |
|
Percent Equity |
71% |
78% |
73% |
The above table mainly help in depicting the overall capital structure of Boral Limited, which could help in understanding financial capability of the company. In addition, the percentage of debt for the company has mainly been inclining over the period of 2015 to 2017. This relatively indicates the financial deterioration that is been directed by the company, by the high accumulation of debt. The high accumulation of debt indicates the high interest payments that needs to be steered by the company over the period. Moreover, the increment in long term debt has relatively increased over the period of three fiscal years due to the expansion of operations, which is been conducted by the company. In this context, Sundaresan, Wang & Yang (2015) mentioned that companies with high debt accumulatio can reduce the tax outflow, which might help in improving their profit generation capacity.
In addition, the overall table also helps in depicting the percentage equity change, which have conducted by Boral limited over the period of 3 fiscal year. The percentage of equity has relatively declined from 73% to 71% in 2017, which indicates the high accumulation of debt conducted by the company. However, the evaluation also indicated that during 2016 the overall depth percentage of the company the declined immensely to 22%, which rose to 78% in 2016. Nevertheless, during 2017 the overall equity percentage declined for Boral Limited, which indicated low usage of equity within the company. Moreover, from the valuation it could be identified that the capital structure of Boral limited has deteriorated over the period of three fiscal years, as the company uses debt to support their operations (Boral.com.au, 2018).
|
Particulars |
2017 |
2016 |
2015 |
|
Dividend |
0.24 |
0.225 |
0.18 |
|
Current stock price |
6.64 |
5.76 |
5.45 |
|
Dividend yield |
3.61% |
3.91% |
3.3% |
The above table mainly helps in depicting the overall dividend yield that is provided by Boral Limited from 2015 to 2017. The dividend yield of the company has a relatively increased over the period in comparison to the share price. The company has been providing high dividend over the years to their investors, due to the accumulation of high income and revenue. However, doing 2016 the dividend yield of the company increased to 3.91%, which was reduced to 3.61% during 2017 (Boral.com.au, 2018). This was due to the high current stock price, which was during the 2017 financial year. The dividend policy of the company is a right every adequate, where the company provides relevant evidence to the investors, as per their income and revenue. Baker & Wurgler (2015) mentioned that investors evaluate dividend yield of the company to determine whether there is an investment opportunity, which could help in improving their profitability and return.
The valuation of dividend policy mainly indicates your payments that needs to be conducted by the company to its shareholders. The relevant increment of dividend policy between 50% to 70% of the earnings before significant items is considered in line with the commitments of Boral Limited. Boral Limited Dividend policy never changes given with the acquisition of headwaters which is being finalized by the organization. The board of directors relatively determine the determinant policy, amount, nature and timing of the dividend that needs to be paid by the company (Boral.com.au, 2018). The directors of the organization relatively review the Dividend policy regularly in context of the group’s ability to continue its operations. The dividend policy is actually evaluated on the basis of the cash outflow that will be conducted by the company each year. This evaluation helps the organization to detect whether relevant investment opportunities or dividend payments needs to be conducted by the company over the period. Moreover, the directors need to take adequate decision regarding the investments conducted for growing the business to enhance shareholder value. This decision is fully based on capability of the company to conduct its business in future fiscal years. In this context, Baghai, Servaes & Tamayo (2014) mentioned that companies with adequate dividend policy can maintain adequate cash flow, which could help them reduce the problems related to cash stagnation.
The capital structure of the organization is relatively based on the decisions made by directors regarding the current condition of the organization. In addition, adequate capital structure is followed by increasing both equity and debt of the organization at the same time. The debt position of the company is not increased abruptly without the increment of equity position, which helps in maintaining adequate weightage and ratio (Boral.com.au, 2018).
|
Particulars |
0 |
1 |
2 |
3 |
4 |
5 |
|
Sales unit |
100,000 |
110,000 |
121,000 |
102,850 |
87,423 |
|
|
Selling price |
100.00 |
104.00 |
108.16 |
112.49 |
116.99 |
|
|
Revenue |
10,000,000.00 |
11,440,000.00 |
13,087,360.00 |
11,569,226.24 |
10,227,196.00 |
|
|
Cost of goods |
5,000,000.00 |
5,720,000.00 |
6,543,680.00 |
5,784,613.12 |
5,113,598.00 |
|
|
Selling, general and administrative expenses |
1,500,000.00 |
1,545,000.00 |
1,591,350.00 |
1,639,090.50 |
1,688,263.22 |
|
|
Depreciation |
2,000,000.00 |
2,000,000.00 |
2,000,000.00 |
2,000,000.00 |
2,000,000.00 |
|
|
PBT |
1,500,000.00 |
2,175,000.00 |
2,952,330.00 |
2,145,522.62 |
1,425,334.78 |
|
|
Tax |
450,000.00 |
652,500.00 |
885,699.00 |
643,656.79 |
427,600.43 |
|
|
PAT |
1,050,000.00 |
1,522,500.00 |
2,066,631.00 |
1,501,865.83 |
997,734.35 |
|
|
Cash Flow |
3,050,000.00 |
3,522,500.00 |
4,066,631.00 |
3,501,865.83 |
2,997,734.35 |
|
|
Reduction in revenue |
(100,000.00) |
(100,000.00) |
(100,000.00) |
(100,000.00) |
(100,000.00) |
|
|
Initial investment |
(10,010,000.00) |
|||||
|
Working capital |
(1,500,000.00) |
1,500,000.00 |
||||
|
Total cash Flow |
(11,510,000.00) |
2,950,000.00 |
3,422,500.00 |
3,966,631.00 |
3,401,865.83 |
4,397,734.35 |
|
Year |
Total cash Flow |
Cum cash |
Discount rate |
Dis cash |
Cum dis cash |
|
0 |
(11,510,000.00) |
(11,510,000.00) |
1.00 |
(11,510,000.00) |
(11,510,000.00) |
|
1 |
2,950,000.00 |
(8,560,000.00) |
0.87 |
2,565,217.39 |
(8,944,782.61) |
|
2 |
3,422,500.00 |
(5,137,500.00) |
0.76 |
2,587,901.70 |
(6,356,880.91) |
|
3 |
3,966,631.00 |
(1,170,869.00) |
0.66 |
2,608,124.27 |
(3,748,756.64) |
|
4 |
3,401,865.83 |
2,230,996.83 |
0.57 |
1,945,027.83 |
(1,803,728.81) |
|
5 |
4,397,734.35 |
6,628,731.18 |
0.50 |
2,186,451.21 |
382,722.40 |
|
NPV |
382,722.40 |
||||
|
IRR |
16% |
||||
|
Payback period |
3.3 years |
||||
|
Discounted payback period |
4.8 years |
||||
|
Profitability index |
1.03 |
Memo to the CEO addressing, explaining, and justifying the chosen methods:
|
Memorandum To: CEO of Masters Limited From: Project Analyst Date: 25-03-2018 Subject: Recommendation for choosing the appropriate method The capital budgeting decision that needs to be conducted for Master Limited can be conducted with the help of Net Present Value (NPV), Internal Rate of Return (IRR), Payback period, Discounted payback period and Profitability index. The above-mentioned investment appraisal techniques could eventually help in detecting the actual financial condition of the proposed project. In addition, the presented scenario of the project is being evaluated, which indicates the position qualities of the investment. Moreover, the building lease income, which is being accumulated by the Master limited is considered as the expenses in the project for deriving the actual income generated from investment. the expenses of $100,000 is been detected from the cash flow of the company to compensate the loss in income generated from each year by renting the place. The assumption considered in the project evaluation is according to the laid down assumptions. The initial investment of the project is mainly calculated by adding the plant, equipment, consultation fees and working capital cost. The total initial investment is at the levels of 11,510,000, which is needed for the project to commence and start. The working capital requirement is at the level of 15% of the revenue generated in 1st year. This initial investment conducted in year 0 might help in reducing the actual financial position of the project in generating high rate of returns. The total revenue is calculated from the rising sales and selling price of the project over the period of five years. In addition, the cost of goods is assumed to be at the levels, of 50% of the revenue, which will be generated from investment. Moreover, the depreciation is calculated to be at straight line for the duration of the project. The Selling, general and administrative expenses is assumed to rise at the levels of 3% per year. The assumption of cash inflow and outflow is conducted to determine the actual cash inflow of the project over the period of five fiscal years. The above-mentioned assumptions of cash inflow and outflow mainly helps in deriving the overall investment appraisal techniques, which could help in detecting actual financial capability of the project. From the overall evaluation discounting rate is detected to be at the levels of 15% and tax rate is detected to be at 30%. This measure of adequate calculation might help in identifying the actual value of the cash inflow conducted by the company over the period of five fiscal year. The NPV calculation is detected to be at 382,722.40, which helps in discounting the cash inflow of the company over the period of 5 fiscal year. In addition, the internal rate of return for the project is calculated to be at the levels of 16%, which is relevantly higher than the discounting rate of the project. Moreover, the high internal rate of return could eventually allow the investor in generating high level of returns from investment. The payback period is detected to be at the level of 3.3 years, while the discounted payback period is at 4.8 years. This relevantly indicates that investment of the project is accumulated before its completion, which depicts its viability. Therefore, from the evaluation of payback period project is considered a viable investment options, which could help Masters Limited to increase the return from investment in future. The discounted payback period mainly accommodates the time value of money and represent the actual time in which initial investment will be collected from the investment. The calculation of profitability index might help in detecting the overall profits, which will be generated from investment of project. Th profitability index is mainly detected to be at the levels of 1.03, which is higher than 1 and indicates the profits that will be generated from investment. the profitability index is derived by deducting NPV with the initial investments, which was conducted in that investment. Hence, from the evaluation of NPV, IRR, payback period, discounted payback period and profitability index the project is considered a viable approach, which could help in generating high level of returns from investment. In addition, the positive valuation of NPV indicates the high valuation of projects, which will allow Masters Limited to in its firm value in future. The internal rate of return is also higher than the weighted average cost of capital, which depicts viability of the project in generating adequate returns for the company. Moreover, the support from payback period, discounted payback period and profitability index is high. This indicates that Master Limited should commence with the project, as it might help in generating high level of return from investment in future. |
Reference
Baghai, R. P., Servaes, H., & Tamayo, A. (2014). Have rating agencies become more conservative? Implications for capital structure and debt pricing. The Journal of Finance, 69(5), 1961-2005.
Baker, M., & Wurgler, J. (2015). Do strict capital requirements raise the cost of capital? Bank regulation, capital structure, and the low-risk anomaly. American Economic Review, 105(5), 315-20.
Boral.com.au. (2018). Boral.com.au. Retrieved 25 March 2018, from https://www.boral.com.au/
DeAngelo, H., & Stulz, R. M. (2015). Liquid-claim production, risk management, and bank capital structure: Why high leverage is optimal for banks. Journal of Financial Economics, 116(2), 219-236.
Graham, J. R., Leary, M. T., & Roberts, M. R. (2015). A century of capital structure: The leveraging of corporate America. Journal of Financial Economics, 118(3), 658-683.
Sundaresan, S., Wang, N., & Yang, J. (2015). Dynamic investment, capital structure, and debt overhang. The Review of Corporate Finance Studies, 4(1), 1-42.
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