Project Report: Financial Management

Project Report: Financial Management Contents Introduction 3 Company overview3 WACC calculations 3 WACC explanation4 Gearing ratio and the difficulties 5 Findings 5 Recommendation 6 Reflection=6 References8 Introduction: Financial management is an effective and efficient way for an organization to manage the financial performance and the position of an organization. It explains that in current scenario, company is required to bear 7.12% due to the total capital (debt and equity) amount which has been raised by the company for the new projects and the

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Project Report: Financial Management

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Contents
Introduction.......................................................................................................................3
Company overview...........................................................................................................3
WACC calculations..........................................................................................................3
WACC explanation...........................................................................................................4
Gearing ratio and the difficulties......................................................................................5
Findings............................................................................................................................5
Recommendation..............................................................................................................6
Reflection..........................................................................................................................6
References.........................................................................................................................8

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Introduction:
Financial management is an effective and efficient way for an organization to manage
the financial performance and the position of an organization. It is a specialized management
process of an organization which makes it easier for an organization to manage the financial
functions of the organization. The financial management process is quite effective for an
organization as it offers a great base to the management of the company to evaluate the
financial performance and the position of the company. Financial management means
organizing, planning, controlling, directing all the financial transaction and activities of a
business such as procurement of funds, utilization of funds etc of an organization.
In the report, capital structure of Altium limited has been identified through
calculating the WACC and gearing ratios of the company. Capital structure combines the
debt, preference share and equity of an organization. It explains about the total capital which
has been funded by the company for its long term investments and the project.
Company overview:
Altium limited is an Australian company. The stock of the company s traded in the
Australian stock exchange. The main operations of the company are to offer software to the
engineers to design the electronic products such as circuit board. Head office of the company
is situated at Sydney in Australia. In the year of 1985, company has come into the market and
the company has managed all the functions and operations very effectively (Home, 2018).
The company is operating its business into various countries to enhance the market base and
become more competitive in the industry. Currently, the company is running its activities in
United Kingdom, Japan, and China etc. Main products of the company include Tasking,
software’s, Circuit board, Upverter etc.
WACC calculations:
WACC is a capital structure technique which is used by the companies and the
financial analyst to measure the total cost of capital of the company. WACC techniques are
used by the organizations to identify the total cost which would be abided by the company
against the total capital amount of the company.
In case of Altium limited, total WACC of the company is 7.12%. It explains that in
current scenario, company is required to bear 7.12% due to the total capital (debt and equity)

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amount which has been raised by the company for the new projects and the long term
investment of the company (Annual report, 2018).
WACC = x Re + x Rd x (1 – Tc)
Here, E/V = 2759/ 2777 = 99%
D/V = 18/2777 = 1%
Re = 2.41+(8%-2.41%)*0.847
= 7.15%
Rd *(1-t) = 5.5%*(1-30%) = 3.85%
So, WACC = 7.12%
(Morningstar, 2018)
WACC explanation:
The WACC explains about the total cost of capital of the company. The WACC of the
company explains that the total weighted average cost of capital of the company was 7.12%
out of which 3.82% is the cost of debt of the company and 7.15% in the cost of equity of the
company (Reuters, 2018). The debt cost and the equity cost of the company has been
evaluated on the basis of after tax cost model and capital assets pricing model.
On the basis of the evaluation, it has been recognized that the WACC of the company
is quite higher due to high cost of equity of the company and the cost of equity weight of the
Altium limited is 99% and the weight of debt amount is just 1%. It explains that the WACC
of the company must be controlled by the company through controlling over the debt and
equity fraction.
Gearing ratio:
Gearing ratio is a capital structure ratio which explains about the total capital of the
company. It measures the long term liabilities of an organization on the basis of the total

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capital employed (total assets – current liabilities) of the company. It measures about the total
risk level of the company. According to the evaluation on the company, the Gearing ratio of
the company is 9% only.
Gearing ratio= Long term Liabilities/ capital employed
Gearing ratio = 18 /(274-74)
= 9%
Capital Employed = Total assets- current liabilities
(Morningstar, 2018)
The table brief about the liabilities in context with the total capital of the company
which is 9%. It explains that the capital structure of the comapny is not at all optimal.
Company has raised the funds through non risky funds only.
Findings:
The above study explains about the Altium limited’s capital structure. On the basis
of the above study, it has been recognized that the weighted average cost of capital of the
company is 7.12% on the basis of market value of equity of the company. The debt and
equity fraction of the company in WACC table is 1% and 99%. And the cost of equity is
3.85% and cost of debt is 7.15%. Thus the weighted debt cost and equity cost of the company
is 0.02% and 7.10%. On the other hand, the capital structure of the company is just 9%
among all the total capital of the company. It says about the higher cost of equity (Ke).

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Figure 1: Capital Structure
Recommendation:
To conclude, the capital structure of the company is not competitive due to weird
capital structure and higher WACC. On the basis of the study, it has been recommended to
the management of the company to reduce the level of the equity amount and enhance the
level debt amount to reduce the WACC of the company as well as the optimal capital
structure of the company would also be better. The optimal capital structure of the company
should be 60:40, 60% of debt and 40% of equity. At this level, capital structure would be
optimal.
Reflection:
In this report, I have calculated the WACC on the basis of CAPM model as well as
the cost of debt has been calculated on the basis of “after tax method”. The CAPM weighted
have been taken on the basis of market value as the current performance could be evaluated
on the basis of market worth of the company only. The marker price of the company has been
multiplied by the weighted average outstanding shares to calculate the WACC of the
company. It has been evaluated that the market WACC of the company is different than the
Book value WACC. However, the difference is not bigger.
For CAPM model, risk free rate has been used of 5 years due to the 5 year historical
data. The risk free rate of the Australia is 2.41% (Bloomberg, 2018). The different years risk
free rate offers different result due to the market fluctuations, economical factors and other
macro economical factors. In addition, the beta amount has been calculated on the basis of

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last 5 year stock price of the company which is 0.847. In addition, the market premium is 8%.
The debt interest rate and tax rate has been taken from the annual report.
Overall report was quite interesting to prepare. However, I have found that the
company is not performing well and investors should not invest into the company in current
scenario.