Capital Structure and Company Analysis

This assignment examines the capital structure and performance of a specific company, analyzing key financial ratios like Return on Equity (ROE) and Debt-to-Equity ratio. It investigates the relationship between capital structure and profitability, highlighting the importance of minimizing the cost of capital for shareholder wealth maximization. The analysis also considers competitive pressures from firms like oOh!media Limited and explores opportunities for future growth.

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By student name
Professor
University
Date: 16 September 2017.
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Contents
Question No.1…………..……………………..........……………………………..……………………...3
Question No.2…………..……………………..........……………………………..……………………...8
Introduction and Executive Summary…......………………………………………...8
Report and other analysis.………………..........………………………………………...8
Conclusion…..…………………………………..........……………………………..………...14
Refrences.....……………………………………………………………….....................................15
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Question No.1
As per the given question, the calculation for the depreciation, best case, worst case and base case are
given below:
Amount of the asset to be capitalised Amt (in $)
Capital cost incurred on Lab 1,650,000
Less: Salvage value of the Lab (100,000)
Cost to be depreciated 1,550,000
Life in no. of years 8
Depreciation cost each year 193,750
1 2 3 4 5 6 7 8
Revenues (A) 1,445,000 1,589,500 1,748,450 1,923,295 2,115,625 2,327,187 2,559,906 2,815,896
Less: Costs
Depreciation 193,750 193,750 193,750 193,750 193,750 193,750 193,750 193,750
Staff cost 900,000 954,000 1,011,240 1,071,914 1,136,229 1,204,403 1,276,667 1,353,267
Material cost 210,000 222,600 235,956 250,113 265,120 281,027 297,889 315,762
Marketing cost 46,000 48,760 51,686 54,787 58,074 61,558 65,252 69,167
Other cost 25,000 26,500 28,090 29,775 31,562 33,456 35,463 37,591
Research cost 100,000 - - - - - - -
Total costs (B) 1,474,750 1,445,610 1,520,722 1,600,340 1,684,735 1,774,194 1,869,021 1,969,537
Profits before tax (C) (29,750) 143,890 227,728 322,955 430,889 552,993 690,885 846,359
Tax (30%) - 43,167 68,319 96,887 129,267 165,898 207,265 253,908
Profits after tax (D) (29,750) 100,723 159,410 226,069 301,622 387,095 483,619 592,451
Cash Profits (D+Depn*70%) 105,875 236,348 295,035 361,694 437,247 522,720 619,244 728,076
1 2 3 4 5 6 7 8
Revenues (A) 1,445,000 1,531,700 1,623,602 1,721,018 1,824,279 1,933,736 2,049,760 2,172,746
Less: Costs
Depreciation 193,750 193,750 193,750 193,750 193,750 193,750 193,750 193,750
Staff cost 900,000 990,000 1,089,000 1,197,900 1,317,690 1,449,459 1,594,405 1,753,845
Material cost 210,000 231,000 254,100 279,510 307,461 338,207 372,028 409,231
Marketing cost 46,000 50,600 55,660 61,226 67,349 74,083 81,492 89,641
Other cost 25,000 27,500 30,250 33,275 36,603 40,263 44,289 48,718
Research cost 100,000 - - - - - - -
Total costs (B) 1,474,750 1,492,850 1,622,760 1,765,661 1,922,852 2,095,762 2,285,964 2,495,185
Profits before tax (C) (29,750) 38,850 842 (44,643) (98,573) (162,026) (236,203) (322,439)
Tax (30%) - 11,655 253 (13,393) (29,572) (48,608) (70,861) (96,732)
Profits after tax (D) (29,750) 27,195 589 (31,250) (69,001) (113,418) (165,342) (225,707)
Cash Profits (D+Depn*70%) 105,875 162,820 136,214 104,375 66,624 22,207 (29,717) (90,082)
Particulars Years
Base case workings
Worst case workings
Particulars Years
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1 2 3 4 5 6 7 8
Revenues (A) 1,445,000 1,661,750 1,911,013 2,197,664 2,527,314 2,906,411 3,342,373 3,843,729
Less: Costs
Depreciation 193,750 193,750 193,750 193,750 193,750 193,750 193,750 193,750
Staff cost 900,000 927,000 954,810 983,454 1,012,958 1,043,347 1,074,647 1,106,886
Material cost 210,000 216,300 222,789 229,473 236,357 243,448 250,751 258,274
Marketing cost 46,000 47,380 48,801 50,265 51,773 53,327 54,926 56,574
Other cost 25,000 25,750 26,523 27,318 28,138 28,982 29,851 30,747
Research cost 100,000 - - - - - - -
Total costs (B) 1,474,750 1,410,180 1,446,673 1,484,261 1,522,976 1,562,853 1,603,926 1,646,231
Profits before tax (C) (29,750) 251,570 464,340 713,404 1,004,338 1,343,558 1,738,447 2,197,498
Tax (30%) - 75,471 139,302 214,021 301,301 403,068 521,534 659,249
Profits after tax (D) (29,750) 176,099 325,038 499,383 703,037 940,491 1,216,913 1,538,248
Cash Profits (D+Depn*70%) 105,875 311,724 460,663 635,008 838,662 1,076,116 1,352,538 1,673,873
Best case workings
Particulars Years
 After tax, cash flows are already represented by the last row of each of the workings in
the form of cash profits after tax.
 Payback period: Profits have been taken from the above calculation
Initial Investment 1650000
Particulars Base Worst Best
Payback period 6 years > 8 years 5 years
(1650000 / cash profits)
 Calculation of discounted payback period, net present value and Profitability Index:
Years Amount (in $) Discounted @ 16% Discounted amount
0 (1,550,000) 1 (1,550,000)
1 105,875 0.86 91,272
2 236,348 0.74 175,645
3 295,035 0.64 189,016
4 361,694 0.55 199,760
5 437,247 0.48 208,179
6 522,720 0.41 214,546
7 619,244 0.35 219,107
8 728,076 0.31 222,082
(30,393)
> 8 years
0.98
Case 1: Base Case
NPV (Sum total of PV of inflows - PV of outflows)
Discounted payback period
Profitability Index (PV of the future cash inflows) / Initial Outflow)
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Years Amount (in $) Discounted @ 16% Discounted amount
0 (1,550,000) 1 (1,550,000)
1 105,875 0.86 91,272
2 162,820 0.74 121,002
3 136,214 0.64 87,267
4 104,375 0.55 57,645
5 66,624 0.48 31,721
6 22,207 0.41 9,115
7 (29,717) 0.35 (10,515)
8 (90,082) 0.31 (27,477)
(1,189,972)
> 8 years
0.23
Case 2: Worst Case
NPV (Sum total of PV of inflows - PV of outflows)
Discounted payback period
Profitability Index (PV of the future cash inflows) /
Initial Outflow)
Years Amount (in $) Discounted @ 16% Discounted amount
0 (1,550,000) 1 (1,550,000)
1 105,875 0.86 91,272
2 311,724 0.74 231,662
3 460,663 0.64 295,127
4 635,008 0.55 350,709
5 838,662 0.48 399,298
6 1,076,116 0.41 441,683
7 1,352,538 0.35 478,568
8 1,673,873 0.31 510,574
1,248,892
6 years
1.81
Case 3: Best Case
NPV (Sum total of PV of inflows - PV of outflows)
Discounted payback period
Profitability Index (PV of the future cash inflows) /
Initial Outflow)
Other Models of capital budgeting that could have been used in place of the best and worst cases
projections are mentioned below.
 Internal rate of return: This theory of capital budgeting calculates the rate at which the company
would be giving the returns on a particular project. It is calculated by equating the total outflows
and the total inflows. This generally gives the rate at which the inflow and outflow would be
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equal. If the IRR is less than the expected rate of return, the project should be rejected and if IRR
is equal or higher than the expected rate of return, the project should be accepted.
 Return on investment: It is like calculating the percentage of return that the investor in the asset
would be earning each year. This is calculated by getting the distributable profit amount year on
year.
 Besides all this, weighted average can be given to the best, worst and base cases or simply a
ratio may be given depending on the industry trend or some other measure and it can be seen
that how the return would be there on an average basis. If it is positive or zero, the project can
be accepted and if it is negative, it has to be rejected. (Bena, Ferraira, Matos, & Pires, 2017)
Decision on the above Project
Based on the above inputs given and the results taken out, it is evident that as per the best case and
the base case the project can be accepted to a given extent with expectation that the company will
be cash rich in the future but as per the worst case, the project cannot be accepted as it is bleeding
from all the perspectives be it NPV or discounted payback period or profitability index or the cash
flows. (Fay & Negangard, 2017) The above decision requires further information in order to take the
decision on this. Other factors include the ratio of the projection of the base, worst and the best
cases, whether there is any other option available through any other vendor or whether there is any
make or buy option available.
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Question No. 2
Introduction and Executive Summary
APN Outdoor group is one of the widely known advertising company operating in Australia. It is
dealing in many kinds of advertisement services like digital billboards, billboards on roadside, rails,
airport, etc. throughout Australia and New Zealand. It also gives online media services in both the
countries. It is headquartered in Pyrmont, Australia and was founded in 2004. This is also listed on the
Australian Stock Exchange. (Boccia & Leonardi, 2016)
Report on the company
As per the given data points, with beta for the company being 1.3 for year 2016, the market rate
of interest to be 7% and the risk free rate of interest based on yield on Australia Government Bonds
being 2.4%, the required rate of return by the company as per Capital Asset Pricing Model would be:
R = RF + (RM-RF) * Beta
Or, R = 2.4 + (7-2.4) * 1.3 = 8.38%
As per the company’s capital structure over the last 2 years the following is the detailed break up of the
capital structure and the credit facility being used by the company is as follows:
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FQ2 2017 (J un- 30- 2017) Capital Structure As Reported Details
Description Type Principal Due (AUD)
General Corporate Facility A * Revolving Credit 80.0
General Corporate Facility C * Revolving Credit -
Working Capital Facility B * Revolving Credit 23.0
FY 2016 (Dec- 31- 2016) Capital Structure As Reported Details
Description Type Principal Due (AUD)
General Corporate Facility A Revolving Credit 80.0
General Corporate Facility C Revolving Credit -
Working Capital Facility B Revolving Credit 23.0
APN Outdoor Group Limited Capital Structure
Details
As per the table shown below which shows the mix of debt and equity in the capital structure, the
company has increased the proportion of debt in the last year implying that the company is using the
benefit of trading on equity and the leveraging effect. Debt usually comes with the low cost of capital
and thus make the weighted average cost of capital cheaper. The proportion of debt has increased in
the capital structure from 21% in 2015 to 27.6% in 2016. (David, 2005)
Capital Structure Data
For the Fiscal Period Ending
Currency AUD AUD AUD
Units Millions % of Total Millions % of Total Millions % of Total
Total Debt 65.9 21.0% 102.7 27.6% 107.0 28.9%
Total Common Equity 248.1 79.0% 269.2 72.4% 263.3 71.1%
Total Capital 314.0 100.0% 371.9 100.0% 370.3 100.0%
Debt Summary Data
For the Fiscal Period Ending
Currency AUD AUD AUD
Units Millions % of Total Millions % of Total Millions % of Total
Total Revolving Credit 66.5 100.8% 103.0 100.3% 103.0 96.3%
Total Principal Due 66.5 100.8% 103.0 100.3% 103.0 96.3%
Total Adjustments (0.6) (0.8%) (0.3) (0.3%) 4.0 3.7%
Total Debt Outstanding 65.9 100.0% 102.7 100.0% 107.0 100.0%
APN Outdoor Group Limited Capital Structure
12 m onths Dec-31-
2015
12 m onths Dec-31-
2016
3 m onths Jun-30-
2017
12 m onths Dec-31-
2015
12 m onths Dec-31-
2016
3 m onths Jun-30-
2017
The parameters which are required to calculate the firm’s weighted average cost of capital include the
return expected by the shareholders for equity (8.38% as calculated above), the cost of debt (being 2.4%
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post tax as the bank loan rate pre tax is 2.87%) and the proportion of the debt and equity in the capital
structure being 27.6%:72.4%, the weighted average cost of capital comes to: (Das, 2017)
Capital Structure Data
For the Fiscal Period Ending
Units Ratio
Cost of
funds Ratio
Cost of
funds
Total Debt 21.0% 2.4% 27.6% 2.4%
Total Common Equity 79.0% 8.4% 72.4% 8.4%
Total Capital 100.0% 100.0%
Weighted average Cost of capital 7.12% 6.73%
12 m onths Dec-31-
2015
12 m onths Dec-31-
2016
APN Outdoor Group Limited WACC
The above calculation is imperative of the fact that weighted average cost of capital is lower than
normal cost of capital as the increased use of debt has made it cheaper and cost effective for the
company. This has made 2 impacts on the firm namely it has lowered the cost to the company and the
other being dilution in the control by the management. (Goldmann, 2016)
The gearing ratio reflects the proportion of debt in the total capital of the company and as evident from
the above calculation, the annual report also shows the partial increase in the debt portion by 5%, which
has also resulted in increase in profits.
The competing company in the same industry which has been considered here for comparison of the
capital structure is oOh!media Limited. It is yet another growing company in the field or media and
advertising in Australia. Totally, opposite, this company has the debt equity mix to lower down in the
last year from 29.2% to 27.2% in the overall capital. (Heminway, 2017) However, the range remains the
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same in between 25% - 30% but still the graph is opposite showing that the company is trying to get the
ownership increased in the company and thus increase the return on capital for the shareholders.
Capital Structure Data
For the Fiscal Period Ending
Currency AUD AUD AUD
Units Millions % of Total Millions % of Total Millions % of Total
Total Debt 105.0 29.2% 122.4 27.2% 145.4 31.3%
Total Common Equity 256.4 71.2% 328.2 73.1% 320.3 69.0%
Total Minority Interest (1.5) (0.4%) (1.4) (0.3%) (1.6) (0.3%)
Total Capital 360.0 100.0% 449.3 100.0% 464.1 100.0%
Debt Summary Data
For the Fiscal Period Ending
Currency AUD AUD AUD
Units Millions % of Total Millions % of Total Millions % of Total
Total Revolving Credit 105.0 100.0% 123.0 100.5% - -
Total Capital Leases 0.1 0.1% 0.1 0.1% - -
General/Other Borrow ings - - - - 145.4 100.0%
Total Principal Due 105.1 100.1% 123.1 100.5% 145.4 100.0%
Total Adjustments (0.1) (0.1%) (0.7) (0.5%) - -
Total Debt Outstanding 105.0 100.0% 122.4 100.0% 145.4 100.0%
oOh!media Limited Capital Structure
12 m onths Dec-31-
2015
12 m onths Dec-31-
2016
3 m onths Jun-30-
2017
12 m onths Dec-31-
2015
12 m onths Dec-31-
2016
3 m onths Jun-30-
2017
On comparison of the other financial ratios for the APN, following was the output.
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For the Fiscal Period Ending 12 m onths
Dec-31-2012
12 m onths
Dec-31-2013
12 m onths
Dec-31-2014
12 m onths
Dec-31-2015
12 m onths
Dec-31-2016
Profitability
Return on Assets % NA 3.6% 4.4% 10.5% 11.0%
Return on Capital % NA 4.3% 5.3% 12.8% 13.5%
Return on Equity % NA 0.2% (6.5%) 17.7% 18.7%
Return on Common Equity % NA 0.2% (7.3%) 17.7% 18.7%
Margin Analysis
Gross Margin % 76.4% 76.0% 76.8% 79.8% 82.5%
SG&A Margin % 55.1% 55.3% 55.0% 51.0% 51.6%
EBITDA Margin % 15.6% 14.2% 14.6% 24.4% 26.1%
EBITA Margin % 12.9% 11.1% 11.7% 21.9% 23.4%
EBIT Margin % 11.6% 9.9% 10.7% 21.0% 22.3%
Net Income Margin % 1.4% 0.1% (4.9%) 13.6% 14.6%
Asset Turnover
Total Asset Turnover NA 0.6x 0.7x 0.8x 0.8x
Fixed Asset Turnover NA 3.7x 3.7x 4.0x 3.8x
Accounts Receivable Turnover NA 5.4x 4.9x 5.0x 5.3x
Inventory Turnover NA 78.9x 79.7x 96.2x 83.3x
Short Term Liquidity
Current Ratio 3.9x 3.6x 2.5x 1.9x 1.9x
Quick Ratio 2.1x 2.0x 2.2x 1.6x 1.8x
Avg. Days Inventory Out. NA 4.6 4.6 3.8 4.4
Avg. Cash Conversion Cycle NA 65.3 54.5 51.0 60.9
Long Term Solvency
Total Debt/Equity 105.6% 104.4% 39.4% 26.6% 38.2%
Total Debt/Capital 51.4% 51.1% 28.2% 21.0% 27.6%
APN Outdoor Group Limited Ratio Analysis
 The profitability ratios shows that the company is on the growing path and all the returns have
increased by almost thrice over the past 4 years. (Meroño-Cerdán, Lopez-Nicolas, & Molina-
Castillo, 2017)
 The gross margin has been somewhat constant and has increased marginally but the net margin
has moved from negative to positive which shows that the company has improved on the sales
as well as has been able to cut on both the direct and indirect costs.
 The turnover ratios are indicative that over the past 5 years, they have all been constant and
have not slowed down. This shows that the internal control mechanism is the firm is being
strong, such that there is no delay in collection; inventory is being liquidated at right time, etc.
 The short term liquidity ratios has come down drastically over the last 5 years but since it is still
in line with the ideal industry trend, it shows that the company has improved its operations and
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planning and is not blocking the funds unnecessarily in the working capital and also possesses a
good liquidity position.
 The long-term solvency ratio has come down many a times in the past few years, which shows
that the company wants to increase the owner’s share in the capital structure and do least
possible dilution such that profitability for shareholders can be increased. (Heminway, 2017)
Significant changes to the capital structure during the past 3 years
As per the above analysis, it is already clear that the company wants minimum dilution in the ownership
and that’s why they are trying to put more of equity and less of debt in the capital structure such that
ROI for the investors can be increased.
Wealth maximisation for the shareholders in the past 3 years
The efficiency ratios shown above shows clearly that both the ROI and ROC have increased multiple folds
in the almost 3 years which shows the company is growing fast and generating wealth for its investors.
(Jefferson, 2017) It is on the growth path and in case continues to do so in the coming years, will be a
market leader both in terms of revenue and profits.
Why is it important to minimise the cost of capital and how can the cost of capital be reduced
The cost of capital is the amount being incurred to infuse the funds in the business in the form of
interest cost, etc. and since this forms one of the major cost it needs to be minimised in order to
maximise the return for the shareholders. This can be done by increasing the share of debt in capital
structure at low interest cost leaving behind major chunk of profits for the investors. (Murray & Markey‐
Towler, 2017) Some of the alternatives include raising funds from the public or issue of debentures, etc.
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Conclusion
From the above analysis of the capital structure and various other ratios, it is concluded that the
company is growing at a higher pace and can achieve higher profits for the shareholders in case the
amount of debt in the entire capital is increased. The competition from the competing firms like oOh!
media Limited makes it difficult to sustain profits but it also provides opportunity to deliver the best.
References
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Bena, J., Ferraira, M., Matos, P., & Pires, P. (2017). Are foreign investors locusts? The long-term effects
of foreign institutional ownership. Journal of Financial Economics, 21-35.
Boccia, F., & Leonardi, R. (2016). The Challenge of the Digital Economy. Markets, Taxation and
Appropriate Economic Models, 1-16.
Das, P. (2017). Financing Pattern and Utilization of Fixed Assets - A Study. Asian Journal of Social Science
Studies, 2(2), 10-17.
David. (2005).
Fay, R., & Negangard, E. (2017). Manual journal entry testing : Data analytics and the risk of fraud.
Journal of Accounting Education, 38, 37-49.
Goldmann, K. (2016). Financial Liquidity and Profitability Management in Practice of Polish Business.
Financial Environment and Business Development, 4, 103-112.
Heminway, J. (2017). Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and
Organic Documents. SSRN, 1-35.
Jefferson, M. (2017). Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland .
Technological Forecasting and Social Change, 353-354.
Meroño-Cerdán, A., Lopez-Nicolas, C., & Molina-Castillo, F. (2017). Risk aversion, innovation and
performance in family firms. Economics of Innovation and new technology, 1-15.
Murray, C., & Markey Towler, B. (2017). A Theory of Return-Seeking Firms.‐ SSRN, 1-14.
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