Capital Structure and Budgeting Analysis

This assignment delves into the financial strategies employed by the APN Outdoor Group. It examines their capital structure, which encompasses both debt and equity financing, and analyzes their budgeting practices, particularly focusing on capital budgeting techniques. The analysis also compares APN's performance to its competitor, Ooh Media, highlighting key similarities and differences in their capitalistic nature and financial risk management.

Running head: ACCOUNTING AND FINANCE
Accounting and Finance
Name of Student:
Name of University:
Author’s Note:

1ACCOUNTING AND FINANCE
Answer to Part A:
Requirement 1:
Particulars 0 1 2 3 4 5 6 7 8
Initial Investment ($1,650,000)
Annual Cash Flow:
Incremental Revene $1,445,000 $1,589,500 $1,748,450 $1,923,295 $2,115,625 $2,327,187 $2,559,906 $2,815,896
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 Costs ($210,000) ($222,600) ($235,956) ($250,113) ($265,120) ($281,027) ($297,889) ($315,762)
Marketing Costs ($46,000) ($48,760) ($51,686) ($54,787) ($58,074) ($61,558) ($65,252) ($69,167)
Other Costs ($25,000) ($26,500) ($28,090) ($29,775) ($31,562) ($33,456) ($35,463) ($37,591)
Depreciation of Lab ($206,250) ($206,250) ($206,250) ($206,250) ($206,250) ($206,250) ($206,250) ($206,250)
Net Profit before Tax $57,750 $131,390 $215,228 $310,455 $418,389 $540,493 $678,385 $833,859
Less: Tax on Profit ($17,325) ($39,417) ($64,569) ($93,137) ($125,517) ($162,148) ($203,515) ($250,158)
Net Profit after Tax $40,425 $91,973 $150,660 $217,319 $292,872 $378,345 $474,869 $583,701
Add: Depreciation $206,250 $206,250 $206,250 $206,250 $206,250 $206,250 $206,250 $206,250
Annual After-Tax Cash Flow $246,675 $298,223 $356,910 $423,569 $499,122 $584,595 $681,119 $789,951
Salvage Value $100,000
Net Annual Cash Flow ($1,650,000) $246,675 $298,223 $356,910 $423,569 $499,122 $584,595 $681,119 $889,951
Cumulative Cash Flow ($1,650,000) ($1,403,325) ($1,105,102) ($748,192) ($324,624) $174,499 $759,094 $1,440,213 $2,330,164
Payback Period
Required Rate of Return 16% 16% 16% 16% 16% 16% 16% 16% 16%
Discounted Cash Flow ($1,650,000) $212,651 $221,628 $228,657 $233,933 $237,639 $239,942 $241,000 $271,458
Cumulative Discounted Cash Flow ($1,650,000) ($1,437,349) ($1,215,721) ($987,064) ($753,131) ($515,492) ($275,550) ($34,549) $236,908
Discounted Payback period
Net Present Value
Profitability Index
4.65
7.13
$236,908
114.36%
Period
Capital Budgeting for Base-Case:

2ACCOUNTING AND FINANCE
Particulars 0 1 2 3 4 5 6 7 8
Initial Investment ($1,650,000)
Annual Cash Flow:
Incremental Revene $1,445,000 $1,531,700 $1,623,602 $1,721,018 $1,824,279 $1,933,736 $2,049,760 $2,172,746
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 Costs ($210,000) ($231,000) ($254,100) ($279,510) ($307,461) ($338,207) ($372,028) ($409,231)
Marketing Costs ($46,000) ($50,600) ($55,660) ($61,226) ($67,349) ($74,083) ($81,492) ($89,641)
Other Costs ($25,000) ($27,500) ($30,250) ($33,275) ($36,603) ($40,263) ($44,289) ($48,718)
Depreciation of Lab ($206,250) ($206,250) ($206,250) ($206,250) ($206,250) ($206,250) ($206,250) ($206,250)
Net Profit before Tax $57,750 $26,350 ($11,658) ($57,143) ($111,073) ($174,526) ($248,703) ($334,939)
Less: Tax on Profit ($17,325) ($7,905) $3,497 $17,143 $33,322 $52,358 $74,611 $100,482
Net Profit after Tax $40,425 $18,445 ($8,161) ($40,000) ($77,751) ($122,168) ($174,092) ($234,457)
Add: Depreciation $206,250 $206,250 $206,250 $206,250 $206,250 $206,250 $206,250 $206,250
Annual After-Tax Cash Flow $246,675 $224,695 $198,089 $166,250 $128,499 $84,082 $32,158 ($28,207)
Salvage Value $100,000
Net Annual Cash Flow ($1,650,000) $246,675 $224,695 $198,089 $166,250 $128,499 $84,082 $32,158 $71,793
Cumulative Cash Flow ($1,650,000) ($1,403,325) ($1,178,630) ($980,541) ($814,291) ($685,792) ($601,710) ($569,552) ($497,760)
Payback Period
Required Rate of Return 16% 16% 16% 16% 16% 16% 16% 16% 16%
Discounted Cash Flow ($1,650,000) $212,651 $166,985 $126,907 $91,818 $61,180 $34,511 $11,378 $21,899
Cumulative Discounted Cash Flow ($1,650,000) ($1,437,349) ($1,270,364) ($1,143,457) ($1,051,638) ($990,458) ($955,948) ($944,569) ($922,671)
Discounted Payback period
Net Present Value
Profitability Index
Capital Budgeting for Worst-Case:
Period
10.34
50.13
($922,671)
44.08%

3ACCOUNTING AND FINANCE
Particulars 0 1 2 3 4 5 6 7 8
Initial Investment ($1,650,000)
Annual Cash Flow:
Incremental Revene $1,445,000 $1,661,750 $1,911,013 $2,197,664 $2,527,314 $2,906,411 $3,342,373 $3,843,729
Staff Cost ($900,000) ($927,000) ($954,810) ($983,454) ($1,012,958) ($1,043,347) ($1,074,647) ($1,106,886)
Material Costs ($210,000) ($216,300) ($222,789) ($229,473) ($236,357) ($243,448) ($250,751) ($258,274)
Marketing Costs ($46,000) ($47,380) ($48,801) ($50,265) ($51,773) ($53,327) ($54,926) ($56,574)
Other Costs ($25,000) ($25,750) ($26,523) ($27,318) ($28,138) ($28,982) ($29,851) ($30,747)
Depreciation of Lab ($206,250) ($206,250) ($206,250) ($206,250) ($206,250) ($206,250) ($206,250) ($206,250)
Net Profit before Tax $57,750 $239,070 $451,840 $700,904 $991,838 $1,331,058 $1,725,947 $2,184,998
Less: Tax on Profit ($17,325) ($71,721) ($135,552) ($210,271) ($297,551) ($399,318) ($517,784) ($655,499)
Net Profit after Tax $40,425 $167,349 $316,288 $490,633 $694,287 $931,741 $1,208,163 $1,529,498
Add: Depreciation $206,250 $206,250 $206,250 $206,250 $206,250 $206,250 $206,250 $206,250
Annual After-Tax Cash Flow $246,675 $373,599 $522,538 $696,883 $900,537 $1,137,991 $1,414,413 $1,735,748
Salvage Value $100,000
Net Annual Cash Flow ($1,650,000) $246,675 $373,599 $522,538 $696,883 $900,537 $1,137,991 $1,414,413 $1,835,748
Cumulative Cash Flow ($1,650,000) ($1,403,325) ($1,029,726) ($507,188) $189,694 $1,090,231 $2,228,222 $3,642,635 $5,478,383
Payback Period
Required Rate of Return 16% 16% 16% 16% 16% 16% 16% 16% 16%
Discounted Cash Flow ($1,650,000) $212,651 $277,645 $334,768 $384,882 $428,757 $467,080 $500,461 $559,950
Cumulative Discounted Cash Flow ($1,650,000) ($1,437,349) ($1,159,704) ($824,936) ($440,054) ($11,297) $455,782 $956,244 $1,516,194
Discounted Payback period
Net Present Value
Profitability Index
Capital Budgeting for Best-Case:
Period
3.79
5.29
$1,516,194
191.89%
Requirement 2:
It is clear from the table shown above the net value at present methods have been utilised
for determining the future cash flow of the project. The approaches of capital budgeting involve
several techniques for the case projection. Payback periods and average rates of return are the
methods used for the estimation of project risks.
Requirement 3:
It is clear from the above table that the net value at present is positive and 191.89% is the
profitability index of the project. A positive value of the project is an indication that the project is
viable and investments can be undertaken. The profitability index helps in the measurement of

4ACCOUNTING AND FINANCE
the cost benefit ratio. A value of 191.89% explains that the value of the cash flow at present is
more than the previous investment amount. Information related to the acceptance and refusal of
projects can be created by capital budgeting techniques (Hasan, 2013).
Answer to part B:
Introduction:
The report helps to understand the capital structure of the APN outdoor group which is
mentioned in the Australian Stock Exchange. The discussed report explains the weighted average
calculation as well as the major analysis of organisational fiscal ratios.
Analysis of the capital structure of APN group:
The cost of capital of the APN Group can be reduced by the increase in the total
proportion of the debt value in the fiscal structure. It is found that the weighted average cost of
capital of APO is at 8.32%. In year 2016, an additional amount of $181.8 equity was raised by
APN. The annual report clearly states that analysis of the financial year 2016, shows the
reduction in the proportion of debt in the capital structure (Brief & Peasnell, 2013). The total
equity value has been found to increase considerably from $ 461525 in year 2015 to $ 836465 in
year 2016. Value of total debt to total equity was 38.1 in present fiscal year and total debt to total
capital was found to be 27.61 (Christensen & Kent, 2016).

5ACCOUNTING AND FINANCE
Computation of After-Tax WACC:
Particulars Amount Weightage Return Rate
Weighted
Return
Total Equity Capital $836,465 83.83% 8.38% 7.03%
Total Debt Capital $161,309 16.17% 11.42% 1.85%
Tax Rate 30%
After-Tax Weighted Average Cost
of Capital 8.32%
Computation of After-Tax Weighted Avergae Cost of Capital:
Fiscal ratio analysis of APN:
The analysis of the liquidity position of the organisations is performed by viewing the
figures of the present ratios, cash ratios as well as quick ratios. Cash ratio of APN was found to
be 0.38, current ratio as 1.90 and quick ratio as 1.89. Organisational ratio of interest coverage is
obtained as 25.96 and 0.23 is found to be the long-term debt to total assets (Andor, Mohanty &
Toth, 2015).
It can be clearly stated that the net operational flow of cash in the companies has reduced
significantly in the last three fiscal years. The earnings per share of the group was 19% below
target. This is believed to be because of strategic activities and in the present year, the value
stood at 0.29. A significant decline in earnings per share was noticed from 44.4 in year 2015 to
31.4 in year 2016. Price earnings ratio for year 2017 stood at 16.92.
Competitor performance of APN group:
The APN group has Ooh Media as one of its competitors. The equity capital value
increased including the organisational borrowings. This the group has both debt as well as equity

6ACCOUNTING AND FINANCE
in the capital structure. Despite this the dependency on the equity is comparatively more
(Gerrans, Faff & Hartnett, 2015).
The APN group has felt a strong flow of cash helping in the funding of the investment
activities. However the capitalistic nature of both the organisations is similar (Hise & Strawser,
2013).
The APN Outdoor Group Structure of Capital:
Basically the cost of the capital is the rate of the return that is expected by the
organisation on the capital. This is for the purpose of earning a substitute investment value with
an equivalent amount of the risk. The organisational structure of capital includes the
amalgamation of the debts with the equity for the reason of the financing of the assets. T he
weighted average cost of the capital is influenced significantly by the fiscal decisions of the
company and the changes in the capital structure influences the weighted average cost. It must
also be considered that the rise or fall of the weighted cost of the capital is directly proportional.
It is crucial for an organisation to reduce the capital cost in order to increase the market
value. An important method for the reduction is the restricting of the capital as well as the cost of
the capital as well. The funding will get cheaper as the lost of the capital gets lower. The
financial cost can also be reduced by opening the line of credit. Bank loans, bonds and credit
card debts include some of the common natures of bank loans.
Conclusion:
It can be understood from the analysis and explanation discussed above that the fiscal
structure of the APN group includes both debentures as well as equity. The revenues as well as

7ACCOUNTING AND FINANCE
the earnings before the interest have experienced a trend of an upward nature. This has also been
experienced by organisational taxes that assist in the generation of the satisfactory returns to the
shareholders. Satisfactory returns have been provided to the shareholders and also in the payment
of dividends to them.

8ACCOUNTING AND FINANCE
References:
Andor, G., Mohanty, S. K., & Toth, T. (2015). Capital budgeting practices: A survey of Central
and Eastern European firms. Emerging Markets Review, 23, 148-172.
Brief, R. P., & Peasnell, K. V. (Eds.). (2013). Clean surplus: A link between accounting and
finance. Routledge.
Christensen, J., & Kent, P. (2016). The decision to outsource risk management
services. Accounting & Finance, 56(4), 985-1015.
Gerrans, P., Faff, R., & Hartnett, N. (2015). Individual financial risk tolerance and the global
financial crisis. Accounting & Finance, 55(1), 165-185.
Hasan, M. (2013). Capital budgeting techniques used by small manufacturing
companies. Journal of Service Science and Management, 6(01), 38.
Hise, R. T., & Strawser, R. H. (2013). Application of Capital Budgeting Techniques to
Marketing Operations. Readings in Managerial Economics: Pergamon International
Library of Science, Technology, Engineering and Social Studies, 419.