Sources of Long Term Finance for Listed Company

This article discusses the sources of long term finance for a listed company, focusing on Hibiscs Petroleum Berhad. It also explores the shareholder wealth maximization model, capital structure theory, calculation of WACC, and the relevance of capital structure theory to the company.

CORPORATE FINANCE

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Sources of long term finance for listed company........................................................................3
Shareholder wealth maximization model....................................................................................4
Capital structure theory...............................................................................................................5
Calculation of WACC.................................................................................................................6
Capital structure theory and Modigliani Miller view..................................................................8
Benefit of Modigliani Miller Theory..........................................................................................9
Conclusion And Recommendation..................................................................................................9
Skill set and reflection...............................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Corporate finance is defined as the area of finance which is related with the sources from
which a company can get finance or borrow money from others for business purpose. The
corporate finance includes the capital structure of the company that is what type of finance is
borrowed from which source of finance (Elmagrhi and et.al.,2018). The current study is based
over the Malaysian based company relating to the oil and natural gas company which is Hibiscs
Petroleum Berhad which was founded in 2007 and is headquartered in Kuala Lumpur in
Malaysia. The capital structure of the company also includes both debt and equity as this is a
good source of financing for the company.
This company is the first listed independent oil and gas company which is focused to
deliver value by producing oilfields. The current report will start by discussing the long term
sources of finance that is sources from which the company can borrow money for longer period
of time. Further the report will also highlight the shareholder wealth maximization model and the
capital structure theory of finance. Next the discussion will bring out the calculation of WACC
that is weighted average cost of capital and in the end the discussion will include the capital
structure theory with M M views and its relevance to the company (ALmuaither and Marzouk,
2019).
MAIN BODY
Sources of long term finance for listed company
The source of finance is defined as the place from which the company can get or borrow
finance for the use of money within the business. This source of finance helps the Hibiscs
Petroleum in borrowing money from outside the world. No business can run without the money
and money is the lifeline of the company without which no business can exist. For every activity
of business the most important thing is the money as without this any work can be initiated
within the business. Hence, for the success of the business it is very necessary that the business
allocates the money in such a manner that this is optimally utilised. Hence, the money or the
finance is a limited and scarce resource for the business without which the business cannot
function (Sun and et.al., 2016). Hence there are many different sources from which the finance
can be borrowed and can be applied within the business for its successful operations. The major
long term sources of finance for Hibiscs petroleum are as follows-

Equity capital- this is a form of borrowing sources which includes the fund pain in the
business by the people who gets shares and stock in exchange of money they are investing into
the business (Devereux, Maffini and Xing, 2018). This is the core or basic type of source from
which the company can borrow finance. Here the people investing within the business are known
as equity shareholders and the income which they receive in exchange of investing the money is
called dividend. This equity financing is referred to as core financing of the business and this is
very risky as if the company will face any of the loss then the equity shareholders will not get
any dividend. This is majorly because of the reason that the equity shareholders get the money
after all the other expenses and preference capital is paid off. The equity shareholders are the
owners of the company and they are the decision takers of the company.
Preference capital- this is another source of financing the money which is being used by
Hibiscs Petroleum. This is that portion of the capital which is raised by offering preference share
within the market. These shareholders are not the owners of the company they are just the
investors within the company (Garcia, 2016). Hence, they just get the dividend over the
investment they have made. These people has no voting right and no right in the decision making
process of the company.
Debentures- this is a type of long term fixed rate of interest instrument issued to people
against some security. This is a type of loan which the company is taking form the people by
issuing them a security named debenture which is not having any ownership right in the
company. On the debenture the person holding the debenture receives interest and this rate is
decided by the company. This is generally a type of loan which Hibiscs Petroleum takes from the
people who are interested in paying the money in business and the company has to pay interest in
exchange of the money invested.
Term loans- this is another form of capital which can be borrowed by the company in order
to take money from outside the business. This is a type of monetary loan which is repaid on
regular intervals for a fixed period of time and is repaid after that particular point of time. This is
taken from either any bank or any financial institution or any personal people. In against of the
loan provided the loan givers charges some rate of interest which needs to be paid by the
company.

Shareholder wealth maximization model
The shareholders are the people who invest the money within the company and are either
the owner in case of equity shareholder or are just the shareholder in case of preference
shareholder (Armour and Enriques, 2018). Hence, for the effective working of the company it is
very necessary for the company to keep the shareholders happy and satisfied. This is basically
because of the reason that if the shareholders will not be satisfied then they might take their
investment back form the company and this may result in loss for the company (Terence, 2017).
The main aim of shareholder wealth maximization is to increase the wealth of the company and
not focusing on the profit maximization.
Here the main aim of the company is to maximize the present values of the expected
future cash flow of the shareholders. The value of shareholder is also known as the wealth
maximization and this means the the ultimate sign of success of company is the shareholder only.
If the shareholders are not satisfied it means that the company is not working in effective manner
and of they are satisfied then it means that the company is working in effective manner. The
wealth maximization model states that the interest rates for the company must be increasing but
not by reducing the prices of shares. Rather both the price of share and the rate if interest must be
growing for the shareholder then only they will be satisfied. If the shareholder wealth will be
maximised then the shareholder will invest more in the business and this will help the business to
grow in better manner.
Hence, this will assist the company to grow in more effective manner. Also, if the
shareholders will get more return then they will participate in more effective manner in the
decision making process and this will help the company in taking more effective decision. With
help of better involvement of shareholder they will analyze all the risk associated with the
working and operations of the company and will help the company in making decision like
where to invest, from where to borrow and this will assist the company in managing the
operation in effective manner. Also, this will assist the company in taking management decision
because if the shareholder will be satisfied then they will try to manage the company in more
effective manner. This is majorly pertaining to the fact that if the company will maximize the
wealth of shareholder then the shareholders will try to manage the company in more effective
and efficient manner. Thus, this shareholder model will assist Hibiscs Petroleum in managing
their shareholders in effective manner.

Capital structure theory
The capital structure is referred to as the combination of the sources of capital which
Hibiscs uses in order to run the business in effective and successful manner (Wilson, 2016). This
source of finance can be either owners fund or borrowed fund or a combination of both of them.
Other then the source of finance capital structure also includes the style of management being
used by the company, the risk within the business, condition within the market, flexibility if
financing and all other related aspects of the business decision. The major aim of the capital
structure is to maximise shareholder wealth and to enhance the valuation of the company by
increase in the market price of the shares (Almamy, Aston and Ngwa, 2016). The value of
business and shareholders is totally dependent over the earning and the weighted average cost of
capital and this includes the cost which is levied at time of arranging of the finance.
The business has the option of choosing the way of financing that is whether to go for
equity or debt or a combination of both. Hence, this structure will help the company in managing
the way a business can be managed in a profitable and effective manner. This is because of the
cost of arranging the finance will be high then it will not be profitable for the company and this
may result in loss. Hence, it is very crucial for Hibiscs petroleum to manage the borrowing in
effective manner. This is because if the mix of both the sources will be good then there will be
no losing situation for Hibiscs petroleum. Hence, the capital structure will assist the company in
knowing the fact that how much cost is levied in arranging for the finance with help of a
combination of debt and equity.
Hence, this will help the company and shareholders in managing the cost as the
estimation of the cost will help the shareholders in arranging for the cost in advance. Also, the
capital structure can be said as a systematic and more sorted way of financing the money for the
operation of the company as this will assist the company in managing the financing activities of
the business. This is majorly because of the fact that equity is the owners’ capital but the debt is
the borrowed fund and it is a liability of the company which needs to be paid off at certain pint of
time. Hence, this capital structure will help the Hibiscs petroleum in estimating the time in which
the whole liability will be paid off. Also, this capital structure will guide the company the
duration in which the whole liability will be paid off. Thus, this time duration estimation will
assist the company in arranging for the money equally up to the end of the payment period.

Hence, this will help Hibiscs petroleum in managing their finance in very effective manner such
that as and when there is requirement of the finance it can be managed effectively.
Calculation of WACC
Weighted average cost of capital that is WACC is a model which helps the company in
calculating the cost of capital for each different type of capital which is generated by the
company (Elmagrhi, Ntim and Malagila, 2018). For the calculation of the WACC all the
different types of sources of finance whether it be equity, preference or debenture or bond or any
other sort of long term debt used by the company. The rate of WACC increases if the rate on
equity of company increases and also a rise in WACC means decrease in the valuation of the
company and it increases the risk for the company as its cost of borrowing has increased. For the
calculation of the WACC of Hibiscs petroleum it is essential the the cost of each capital or
source is multiplied by the weight assigned to each of the capital. After that the sum of the result
is done and it again multiplied with the corporate tax rate (Elmagrhi and et.al.,2018).
The cost of equity is little tough to be calculated because of the reason that the share capital is
not having any explicit value. Thus, for this shareholder will expect a rate of return and will
multiply it with the cost. For the purpose of calculation of cost of debt the market rate of paying
debt is considered and then this is multiplied with the assigned weight. Then this is totalled and
then the sum of both the debt and equity is made.
Computation of cost of capital
Cost of equity
Particulars Figures
Rf (risk free rate) 3.47%
Beta 2.31
Rm (market return) 6%
Cost of equity
Rf +beta * (Rm – Rf)
5.9 or 6%
Cost of debt
Particulars Figures
Rf (risk free rate) 3.47%
Credit spread 2%

Tax rate 27.5%
Cost of debt
Rf + credit spread * (1 – corporate tax rate)
7%
From the above calculation it is interpreted that the cost of equity is 6 % and the cost od debt is 7
%. Hence, it means that is Hibiscs petroleum will go for equity then they have to incur 1 % less
cost as compared to the debt.
WACC
WACC= (E/V×Re) + (D/V×Rd × (1−Tc))
Re = Cost of equity
Rd = Cost of debt
E = Market value of the firm’s equity
D = Market value of the firm’s debt
V = E + D = Total market value of the firm’s financing
E/V = % of equity financing
D/V = % of debt financing
Tc = Corporate tax rate
Particulars Figures Weight
Equity value 1237532 99.83%
Debt 2063 0.17%
V 1239595 1 or 100%
Particulars Figures
Re (cost of equity) 6%
Rd (cost of debt) 4%
E (market value of the firm’s equity) 1237532
D (market value of the firm’s debt) 2063
Tc (Corporate tax rate) 27.5%
WACC 5.99 or 6%

Form the above data it is clear that if the company uses the mix of both the equity and debt the
they will incur 5.99 % of cost as per the weighted average cost of capital.
Capital structure theory and Modigliani Miller view
Capital structure theory is the approach to financing business activity through a combination
of equalities and liability in the organization. Capital structure is the mix of different owner
supplied capital and borrowed capital in the market. Generally, this capital is used to finance
different business operation. There are four different type of capital theory i.e. net income, net
operating income, traditional and M&M approach.
Modigliani Miller theory is an influential theory of capital structure which generally used
to form a basis for modern thinking. This theory used to explain that in the absence of taxes,
bankruptcy cost and agency cost. Value of the firm is unaffected by the way that how that firm is
financed. This theory of capital structure is called as capital structure irrelevance principle. In
simple words it can be said that Modigliani Miller theorem states that a firm's value is based on
its ability to earn revenue plus the risk of its underlying assets. M&M approach used to calculate
capital on both the proposition that is with the taxes and without taxes in the organization. This
theory used to depend upon variety of Assumption regarding capital structure of the company,
such as No transaction cost, Equall Borrowing costs, Handling of Excess cash in the
organization.
Benefit of Modigliani Miller Theory
HIBISCS (5199) MAIN HIBISCUS PETROLEUM BERHAD will also be benefited in
much way by adopting this theory in the organization. One of the biggest benefits which will be
brought by this theory in the company is that it used to reduce the proportion of the company
used debt in the organization. As this theory used to ignore the test in the organization in finding
out the capital structure of company (Yapa Abeywardhana, 2016). Another benefit which has
been find out is that it used to equals the total discounted value of future taxes saved by issuing
debt instead of equity. This eventually means that MM approach in the organization used to help
the company in getting tax benefit accrued by interest payment in the organization. Also, this
theory also help the company in stating marketing value of company on the basis of earning
power of the company in the market and also underlying variety of the risk associated with the
asset of the company. Another reason for the same is that it used to bring the independent of the
way it finances investments or distributes dividends.

Conclusion And Recommendation
After going through the above report it has been concluded that there are 4 type of capital
structure in the real. 4 type of structure are net income, net operating income, traditional and
M&M approach. All the structure used to bring variety of benefit for the organization. MM
approach also used to variety of the benefit in the such a way. At the same time there are many
disbenefit which are also brought by the same in the organization, reason behind the same is
identified that it used to based upon variety of different assumption regarding capital structure of
an organization.
It has been also recommended to the organization that they uses MM approach of capital
structure in the organization. Reason behind the same is identified that it will help the
organization in marketing value of company on the basis of earning power of the company in the
market. Also it will help in reducing the proportion of the company used debt in the organization.
Skill set and reflection
Making this report has helped me in evolving variety of my skill, as with the help of this
report I was able to build a good sort of sourcing and numeric skill of mine in the market. As this
report has asked me in going through variety of the source to collect different sort of information
regarding the project. Also, this report has asked me to collect good source of information from
the market. As a result I was able to build good sort of sourcing skill of mine in the market. Also,
I was able to build a good sort of numeric skill of mine in the market. As this report has asked
me to solve variety of the mathematic problem in the report. Communication skill is another skill
which was developed by me in the project as this project has drive me to communicate with
variety of different party to solve the different issue which used to faced by me.

REFERENCES
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