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

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

3FINANCIAL MANAGEMENT
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 –