Financial Management: Analysis of Capital Structure and Gearing Position of Nufarm Limited

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This document provides an analysis of the capital structure and gearing position of Nufarm Limited. It includes the history of Nufarm Limited, WACC, market value of equity and debt, cost of equity and debt, gearing ratio analysis, recommendation, and reflection.

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Running head: FINANCIAL MANAGEMENT
Financial management
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1FINANCIAL MANAGEMENT
Table of Contents
1. History of Nufarm Limited.................................................................................................2
2. WACC (Weighted average cost of capital)........................................................................2
3. Market value of the equity..................................................................................................7
4. Market value of debt...........................................................................................................7
5. Total market value..............................................................................................................7
6. Cost of equity......................................................................................................................7
7. Cost of debt.........................................................................................................................8
8. Gearing ratio analysis.........................................................................................................8
9. Recommendation................................................................................................................9
10. Reflection......................................................................................................................10
11. Reference.......................................................................................................................11
12. Appendix.......................................................................................................................12
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1. History of Nufarm Limited
Nufarm is the dependable partner behind various agricultural success stories. The
entity finds better way for fighting disease and weeds along with increasing the crop yields
and turns the breakthroughs through the local solutions. In last 2 decades the entity has
experienced continuous growth on the basis of customers need. Further, they have built
global entity for crop protection with the operations in South America and North America,
New Zealand, Europe and Asia (Nufarm, 2019). During the growth period the entity worked
side by side with the distributors, farmers, people and advisors that enhanced their
performance not only in labs but also in the ground. It operates through 2 segments – seed
technologies and crop protection. Segment for seed technologies deals with seed treatment
and sales of seeds products and the segment of crop protection deals with sale as well as
manufacture of products related to crop protection that is used by the farmers for protecting
the crops (Nufarm, 2019).
2. WACC (Weighted average cost of capital)
WACC signifies the blended cost of capital across all the sources including the
preferred shares, common shares and the debt. Cost for each of the capital is weighted
through the percentage of the total capital and adding them together. Major purpose of
WACC is determining cost for each of the part of capital structure represented by the entity
on the basis of debt, equity and preference shares, each of the components has different cost
to the company and hence, while computing the average cost, the total cost is dependent upon
the weights of each type of capital (Koziol, 2014). WACC for Nufarm is computed as below

Beta of Nufarm as calculated is = 1.06
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Risk free rate = Rf = 2.0%,
Market risk premium = Rm = 4.38%
Therefore, cost of capital will be calculated as follows –
Under CAPM approach –
Ke = Rf + β ( Rm – Rf )
Where Ke = Cost of capital,
Rf = Risk free rate,
Rm = Market risk premium,
β = Beta.
Therefore, Ke = 2.0% + 1.06* (4.38% – 2.0%) = 0.045 or 4.50%
Under dividend growth approach –
Cost of equity = (Dividend for next year / current market value of stock) + average dividend
growth rate (Golez, 2014).
Where, Dividend for next year = $ 0.11
Current stock price = $ 7.15
Growth rate = 11%
Hence, Cost of equity = (0.11 / 7.15) + 0.11 = 12.54%
WACC (weighted average cost of capital)
WACC is calculated as follows –

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Where Ke = 4.50%
WACC = E/V * Re +D/V * Rd * (1-Tc),
Where,
E/V = % of equity
D/V = % of debt
Re = Cost of equity = 4.50%
Rd = Rate of debt = 7.10%
Tc = corporate tax rate = 30%
Capital structure of the corporation is as follows –
Items
Amoun
t
Percentag
e
Equity
153750
2 48%
Debt
166868
3 52%
Total
320618
5 100%
WACC = (0.48 * 0.045) + (0.52*0.071) * (1-0.30)
WACC = 4.76%
Where Ke = 12.54%
WACC = (0.48 * 0.1245) + (0.52*0.071) * (1-0.30)
WACC = 8.60%
Usage of weights –
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Weight is the capital proportion in which fresh capital for the new project can is
funded. There are 2 options those can be used for computing the WACC – market value of
weights and book value of weights. In the above calculation book values of weights have
been used rather than using the market values. Though market value weights shall be used,
various reasons are there for which the organisations prefer book value weights (Cho et al.,
2014). One of the scenarios when book value is preferred is when market value of share is
higher as compared to book value. In the given case, the market value of the share is $ 7.15
per share whereas the book value per share is $ 6.02 per share that is lower than the market
value per share. Various other advantages of using the book value weights are as follows –
Firms under practice set the target capital structure in context of the book values
Information regarding book value can be derived easily from published sources like
annual report
Book value for the debt equity ratios are evaluated by investors for analysing the risk
associated with the business of the firm.
Apart from the above, in case of Nufarm it is found that the company did not issue
any corporate bond during the year, and hence, market value of debt is not applicable.
Therefore, the book value weights are considered for the purpose of computation of WACC.
Computation of beta –
Beta has been computed through considering the last 5 years monthly return on company’s
stock and all ordinary index as follows –
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Risk free rate –
Taking short term risk free rate is less accurate as compared to ling term beta. The
reason is that in the short term market is fluctuating and do not reveal the actual scenario as
the changes are temporary. Conversely, in the long term market trend can be established in
more accurate way that leads to more accurate beta. In case of Nufarm the 1 year risk free
rate given in the annual report has been considered (Zabarankin, Pavlikov & Uryasev, 2014).
3. Market value of the equity
Number of equity shares outstanding at the end of the year = 327704975
Share price at closing of the year = $ 7.15 per share
Hence market value of equity = $ 23,43,090,571 (Au.finance.yahoo.com, 2019).
4. Market value of debt
As the company did not issue any corporate bond during the year, market value of
debt is not applicable.
5. Total market value
As for the company, market value of debt is not applicable its market value of equity
is total market value that is $ 23,43,090,571.
6. Cost of equity
Cost of equity for Nufarm has been calculated through capital assets pricing model as
follows –
Ke = Rf + β ( Rm – Rf ) (Elbannan, 2015).
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8FINANCIAL MANAGEMENT
Where, Ke = Cost of capital,
Rf = Risk free rate = 2%
Rm = Market risk premium, = 4.38%
β = Beta = 1.06
Ke = 2.0% + 1.06* (4.38% – 2.0%) = 0.045 or 4.50%
7. Cost of debt
Cost of debt is computed through dividing short term and long term borrowing by the
interest paid amount shown in income statement as follows –
Cost of debt = 118638 / (519968+1148715) = 7.10%
8. Gearing ratio analysis
Gearing ratio
2018 2017
Debt to equity ratio
Total debt 3079743 2041965
Total equity 1971624 1702923
Total debt/equity 1.56 1.20
Debt ratio
Total liabilities 3079743 2041965
Total assets 5051367 3644888
Total liabilities/total assets 0.61 0.56
Gearing ratio is the useful tool used for analysing the entity’s capital structure and is
computed through considering the debt proportion and equity proportion of the entity.
Analysing gearing ratio through capital structure a relationship can be established among
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9FINANCIAL MANAGEMENT
funds provided by the common stockholder and those raised through borrowings (Krüger,
Landier & Thesmar, 2015).
Debt to equity ratio – it is the financial metric that indicates the equity component of a
company’s capital structure as against the debt component. It is computed through
dividing the total liabilities of the entity by the total shareholder’s equity. Debt equity
ratio of 0.5 signifies that the liabilities of the entity are half of the equities. To be
more specific, company’s assets are funded by equity and debt in the ratio of 2:1 and
the investors own 66.67% of company’s earning. Looking into Nufarm’s annual
report it can be identified that major component of capital is raised through debt and
the situation further deteriorates in2018 as compared to 2017 as the debt ratio
increased from 1.20 to 1.56 (Khadafi, Heikal & Ummah, 2014).
Debt ratio – debt ratio is used for measuring the asset proportion financed through
debt. It represents the solvency position of the entity. High debt ratio indicates that the
company is highly leveraged and has risky capital structure. Debt ratio is computed
through dividing the total liabilities by total assets. Looking into Nufarm’s annual
report it can be identified that major proportion of asset is raised through debt and the
situation further deteriorates in2018 as compared to 2017 as the debt ratio increased
from 0.56 in 2017 to 0.61 in 2018 (Khadafi, Heikal & Ummah, 2014).
9. Recommendation
Based on the above findings it can be recommended to the entity that as the entity is
over-dependent on debt, it shall try to raise additional capital, if needed through equity. It is
observed from the gearing ratio of the company that major component of capital is raised
through debt and the situation further deteriorates in2018 as compared to 2017 as the debt
ratio increased from 1.20 to 1.56. further, majorly the entity is dependent on debt for funding

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its asserts and the situation further deteriorated in2018 as compared to 2017 as the debt ratio
increased from 0.56 in 2017 to 0.61 in 2018. Hence, it is recommended that the company
shall at least pay off its short term debts through selling the idle assets to improve its capital
structure.
10. Reflection
In the given task I have analysed the capital structure and gearing position of Nufarm
Limited. While proceeding with the task various issues I faced regarding computing beta and
which risk free rate is appropriate to be considered as different risk free rates like 3 months
basis, 6 months basis and 1 year basis is available. Though beta is readily available in yahoo
finance, i have computed beta myself through considering the last 5 years monthly return on
company’s stock and all ordinary index. In case of risk free rate I was little bit confused
regarding which one is to be considered. However, at last I have considered the one year beta
available through the annual report of the company as I felt it to be more accurate.
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11. Reference
Au.finance.yahoo.com. (2019). Yahoo is now a part of Oath. [online] Available at:
https://au.finance.yahoo.com/quote/QAN.AX/history?
period1=1214850600&period2=1530729000&interval=1mo&filter=history&frequenc
y=1mo [Accessed 17 May 2019].
Cho, S.S., El Ghoul, S., Guedhami, O. & Suh, J., (2014). Creditor rights and capital structure:
Evidence from international data. Journal of Corporate Finance, 25, pp.40-60.
Elbannan, M. A. (2015). The capital asset pricing model: an overview of the
theory. International Journal of Economics and Finance, 7(1), 216-228.
Khadafi, M., Heikal, M., & Ummah, A. (2014). Influence analysis of return on assets (ROA),
return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and
current ratio (CR), against corporate profit growth in automotive in Indonesia Stock
Exchange. International Journal of Academic Research in Business and Social
Sciences, 4(12).
Koziol, C., (2014). A simple correction of the WACC discount rate for default risk and
bankruptcy costs. Review of quantitative finance and accounting, 42(4), pp.653-666.
Krüger, P., Landier, A. & Thesmar, D., (2015). The WACC fallacy: The real effects of using
a unique discount rate. The Journal of Finance, 70(3), pp.1253-1285.
Nufarm. (2019). Home - Nufarm. Retrieved 22 May 2019, from https://www2.nufarm.com/
Zabarankin, M., Pavlikov, K. & Uryasev, S., (2014). Capital asset pricing model (CAPM)
with drawdown measure. European Journal of Operational Research, 234(2), pp.508-
517.
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12. Appendix
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