ACFI 7009 Corporate Finance Concepts

ACFI 7009 Corporate
Finance Concepts

Table of Contents
INTRODUCTION ..........................................................................................................................3
MAIN BODY...................................................................................................................................3
Prepare a critical literature review on capital structure and its impact on investment decisions
and shareholder value.............................................................................................................3
Calculate the weighted average cost of capital, capital gearing ratio and interest cover of
Shabanie Plc...........................................................................................................................5
Determine the net present value of each of all the three projects...........................................8
Incorporate your conclusions by evaluating the proposed investments and financing along
with discussing its impact on shareholders. ........................................................................12
CONCLUSION .............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Corporate finance refers to section which deals in acquisition of capital, its structuring
and the actions that are taken by managers for increasing the value of company of its
shareholders. This also makes use of tools for analysing the operations and allocation of
resources. Its main target is to raise the wealth of shareholders. It has mainly two disciplines.
One is Capital budgeting and other is management of working capital. They both helps in the
growth of business. They also assists the firm in deciding in which project, the investment should
be made (Huang, Hu and Zhu, 2018). The company chosen in this report is Shabanie Plc. It has
been listed on stack exchange for the last 20 years and has a hold over diverged shareholders and
none of them is acquiring more than 5% stakes. Also, for further investment it is preferring debt
over shares. The report is based on reviewing the capital structure and all its possible affects on
the value of shareholders and investment decisions. It further calculates the weighted average
cost of capital, capital gearing ratio and interest cover. It also calculates the net present value of
all the projects offered to the company and choose the most suitable one. Their is also analysis of
the the decision affects the shareholders of the company.
MAIN BODY
Prepare a critical literature review on capital structure and its impact on investment decisions and
shareholder value.
According to Gerestenberg, Capital structure refers to a composition of money that
includes all the long term resources such as reserves, loans, shares, bonds and debts. A properly
structured capital helps in creating a balance between the funds and their sources in proper
manner. In this division more shares means that the company is sharing its ownership with
shareholders at large level and high debts than shares says that the firm tries to keep its
ownership rights with itself only. A choice about the proportion in which they both would be
held by firm represents its capital structure decision (Your article library, 2021).
As per P. Chandra, it is related to the manner in which the firm takes the decision of
diving its cash flows in different parts – fixed and the residual one. Fixed capital is used for
meeting the obligation of debt capital and residual relates to equity shareholders. This refers to
the arrangement in which the funds are raised by a firm from different sources. This amount is

received from debt and shares and is hold by firm for a long period of time. It is concerned with
the numeric or quantitative aspect.
As stated by David Durand, Any type of change occurring in financial leverage results in
the change in its capital costs. It means that if the a firm decides to accept more debt rather than
arranging its funds from equity then it will lead to an increase in its capital structure. This will
further result in decrease in the weighted average cost of capital and raise in the value of the
firm. This is because with rise in debt value, the profits of business decreases. This results in
decrease in the value of tax obligation for firm which raises the value of firm.
According to the theorem provided by Modigliani and Miller, the approach of capital
structuring does not matters for the companies that operates in perfect market as their market
value is determined by the earning made by it and risk related to assets hold by it. As per their
theorem, the value of firm in these markets is independent form the method they choose for
financing their business (Invetopedia, 2021). Shabanie Plc is currently having a share capital
which is diverse among its holders in various proportion but all of them have the sharing of less
than 5% only. This simply means that the firm keeps all the rights of decision taking with itself.
For all the other requirements of arranging capital, it is opting to arrange it from debt. This
means that the firm is not choosing to provide the rights of the firm to any other authority. This
will helps the firm in maintaining and even rising its value in association.
On the other hand, it is also found that Shabanie Plc cannot increase its debt by £ 500m.
This means that of they increase their debt more than this then, the value of firm will decrease.
This can impact the investing decision of parties and shareholder value.
According to Saees, Gull and Rasheed (2013), the capital structure of firm directly affects
its performance. It changes the return earned on assets and equity and also effects the earnings
per share of the company. These are the bases on which the investors decide that whether they
should invest in a particular firm or not. Long and short term debt to capital ratio is used to
analyse the capital structure of firm. They finds a positive relation among the equity an debt
structure and the performance analysis of it.
As stated by Nawaz, Ali and Naseem, (2011) these ratios are the true indicators of the
performance of the company and they holds the capacity to influence the decision of the
shareholders. But at the same time, it also have been analysed that these two variants are
negatively related to each other.