The Introduction to Financial Management

Running Head: Financial Management
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Project report: Financial Management

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Executive Summary
The report has been prepared to evaluate the capital structure of Australian company,
Coca cola Amatil. For calculating and identifying the total capital structure of an
organization, WACC of the company has been calculated as well as the study has been done
on the gearing ratio of the company. The WACC techniques evaluate about the total cost of
the capital of the company and the gearing ratio explains about the total risk position of the
organization. On the basis of executive summary, it has been found that the capital structure
position of the company is quite strong.

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Contents
Introduction.......................................................................................................................4
Coca Cola Amatil.............................................................................................................4
WACC..............................................................................................................................5
Explanation and Judgment................................................................................................6
Gearing ratios and difficulties..........................................................................................7
Findings............................................................................................................................7
Recommendation..............................................................................................................8
Reflection..........................................................................................................................8
References.......................................................................................................................10
Appendix.........................................................................................................................11

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Introduction:
Financial management is a very effective and efficient way to manage the operations
of the comapny and assists organization to achiever the objectives of the company. Financial
management is associated with the top level management of the company. Capital structure is
also a part of financial management of an organization. Capital structure is the combination
of various sources which has helped the company to raise the funds. Capital structure is a
way through which an organization fiancés it resources through debt, equity and hybrid
securities. Capital structure of an organization explains about the total capital of the
organization as well as it briefs that how are the position of the company in terms of risk and
how much cost are bear by the company for the total capital.
In the report, capital structure of Coca cola Amatil has been discussed. For calculating
and identifying the total capital of an organization, WACC of the company has been
calculated as well as the study has been done on the gearing ratio of the company in this
report to identify the performance of the company. Few suggestions have also been given to
the company.
Coca Cola Amatil:
Coca cola Amatil is an Australian company which is operating its business is non
alcoholic beverages industry. The company has been awarded as largest company in the non
alcoholic beverages industry. The company is the subsidiary company of Coca cola. It is an
international company which is running its business in 5 more countries except the Australia
which are New Zealand, Fiji, Samoa and Papua New Guinea and Indonesia. Company has
diversified the product line a lot to capture and grab the entire market. The current products
of the company are Coca cola, Fanta, sprite, canned tomatoes, mother, Sprite zero, spreads,
Coca cola zero, diet coke etc. (Home, 2018). Currently, the company is following the strategy
of diversification and the corporate social responsibilities of the company are also better. The
annual report of the company expresses that the financial performance of the company has
been better.
Currently, the total turnover of the company is $ 4881 million which has been
increased from last year. The annual reports of the organization brief the changes into the
capital structure of the organization in current year from last year. Annual report (2017)
explains about14700 people who are employed by the company to manage the operations and

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the performance of the company. In the report, capital structure of the company has been
identified on the basis of WACC and gearing ratios.
WACC:
WACC is a tool to recognize the total cost of capital which would be bear by an
organization against the total capital amount. WACC briefs about the total cost expenses of
an organization. This tool deals with all the capital related factors of an organization to
identify the total cost f an organization. WACC techniques explain that firstly the cost of each
individual source must be calculated along with the total portion of that share in the total
capital of the organization. In addition, the fraction must be multiplied by the total cost of that
source and hence, the total amount is the total WACC of an organization.
In the case of Coca cola, it has been found that the main sources of capital of the
company are debt and the equity only. For calculating the WACC of the company total debt
and total equity amount has been identified first. Annual report (2017) explains that the total
debt of the company is $ 1930 and the total equity amount of the company is $ 1549 on the
basis of annual report and $ 7,111 on the basis of market value (yahoo finance). It explains
that the fraction of debt amount is 21% and the equity amount is 79% in total market capital
of the company.
For calculating the cost of capital amount of the company cost of debt has been
calculated firstly and it has been found that the total interest rate of the company on long term
debt is 7.5% and the tax rate of the country is 30% (Reuters, 2018). Thus the total cost of debt
of the company is 5.25%.
Calculation of cost of debt
Outstanding debt 1,930
interest rate 7.50%
Tax rate 30.0%
Kd 5.25%
Further, cost of equity of the organization has been calculated. Cost of equity explains
about the total expected amount of investors from the company. Cost of equity of coca cola
Amatil has been calculated on the basis of CAPM technique. CAPM techniques require the
risk free rate (minimum return rate of the market without any risk), market risk premium and
beta (stock volatility) of an organization.

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In case of Coca cola Amatil, it has been found that the risk free rate of the company is
2.41%. The risk free rate of the company has been chosen on the basis of 5 year Treasury
bond yields. Further, the market risk premium of the company is 7% which has been chosen
from the range of 6% to 8% (given in the case). And lastly, the beta amount has been
calculated on the basis of historical stock price of coca cola Amatil and AORD index. The
beta of the company is 0.721 (Yahoo finance, 2018). It leads to a conclusion that the cost of
equity of the company is 5.72%.
Calculation of cost of equity
(CAPM)
RF 2.41%
RM 7.00%
Beta 0.721
Cost of equity 5.72%
On the basis of cost of debt and cost of equity, it has been calculated that the total
WACC of coca cola Amatil is 5.62%.
WACC calculations of Coca Cola Amatil (Market
Value)
(Amount in millions)
Price Cost Weight WACC
Debt 1,930 5.25% 0.21 1.12%
Equity 7,111 5.72% 0.79 4.50%
9,041 Kd 5.62%
(Yahoo finance, 2018)
Explanation and Judgment:
In the above calculations, the total WACC of the company is 5.62% which has been
calculated on the basis of cost of debt and cost of equity of an organization, the calculations
have already been explained in the above part. However, on the basis of calculations, it has
been found that the total cost of debt amount of the company is 5.25% and the fraction of the
debt is 0.21. On the other hand the cost of equity of organization is 5.72% and the total
fraction of equity amount is 5.72% (Annual report, 2018). It explains that the weighted cost
of debt and weighted cost of equity of the company is 1.12% and 4.5%.

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It explains that the cost of debt of the company is lower and so the portion of debt
amount in capital. It leads to a conclusion that company is required to enhance the level of
debt amount to manage the performance and reduce the total cost of capital of the company.
Gearing ratios and difficulties:
Gearing ratio is a financial calculation which explains about the relationship among
the total debt and the total capital of an organization. It is a toll to identify the total risk of an
organization. This tool explains about the relationship among both the factors and offers a
base to top level management of the company to make a decision about the optimal capital
structure and the risk level of the organization. Gearing ratio makes it easy for the external
stakeholders of the organization to make a decision about the company as well.
Simultaneously, the gearing ratio calculations are done by the companies to measure the
capital structure position of an organization.
In case of coca cola Amatil, it has been found that the total long term liabilities of the
organization are $ 2338 and the total current liabilities of the company are $ 1839. On the
other hand, the total assets of the organization are $ 6057. It explains that the capital
employed of the company is $ 4218 ($ 2057- $ 1839). It leads to a conclusion that the gearing
ratio of the company is 55.43%. It explains that the total long term liabilities of the company
are 55.43% of total capital of an organization.
Gearing ratio= Long term Liabilities/ capital employed
Capital Employed = Total assets- current liabilities
Calculation of Gearing ratio
Long term liabilities 2338
Current liabilities 1839
Total assets 6057 4218
Gearing Ratio 55.43%
(Morningstar, 2018)
In calculation of gearing ratios, no problem has been found. As the calculations are
quite simple, the formula has been found in books and the data of financial items of the
company was easily availed at annual report (2017) of the company.
Findings:
On the basis of the above study, it has been found that the total cost of capital of the
company is 5.62% which is the combination of cost of debt and cost of equity of the

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company. On the basis of calculations, it has been found that the total cost of debt amount of
the company is 5.25% and the fraction of the debt is 0.21. On the other hand the cost of
equity of organization is 5.72% and the total fraction of equity amount is 5.72%. It explains
that the weighted cost of debt and weighted cost of equity of the company is 1.12% and 4.5%.
The entire data for calculating the cost of debt and cost of equity of an organization has been
calculated on the basis of historical data, annual report and the Bloomberg (2018).
Further, the risk position of the company has also been evaluated and it has been
found that the gearing ratio of the company is 55.43%. It explains that the total long term
liabilities of the company are 55.43% of total capital of an organization. It is an optimal
capital structure position of an organization. The risk level of the company is balanced in
current scenario.
Recommendation:
To recommend, the capital structure performance, cost and risk, all actors are in the
favour of the organization. The cost of capital of the company is competitive as well as the
risk level of the company is balanced. However, it has been recognized that the cost of debt
of the company is lower and so the portion of debt amount in capital. It leads to a conclusion
that company is required to enhance the level of debt amount to manage the performance and
reduce the total cost of capital of the company. The company could raise the fraction of total
debt amount to 55% to manage the cost and the performance of the capital structure in the
organization. However, the current performance of the company is also better.
Reflection:
The report was quite interesting to undertake. Study on a real company is quite
interesting as you can evaluate lot of the figures to make decision about the company. In the
report, I have used the market data of equity rather than book value of equity to measure the
WACC. The market value has been calculated on the basis of market stock price and the total
outstanding shares of the company. However, there was no much difference among the cost
of capital on the basis of book value and the market value.
Further, the risk free rate of the company is 2.41%. The risk free rate of the company
has been chosen on the basis of 5 year Treasury bond yields as the historical data of the
company were also of 5 years. The different risk free rate directly impacts on the cost of
equity. Further, the market risk premium of the company is 7% which has been chosen from

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the range of 6% to 8% (given in the case). And lastly, the beta amount has been calculated on
the basis of historical stock price of coca cola Amatil and AORD index. The beta of the
company is 0.721. The total interest rate of the company on long term debt is 7.5% which has
been evaluated from its annual report and the tax rate of the country is 30%.
In short, the study was quite interesting. It has helped me a lot to understand about the
market, capital structure position of an organization and the cost and risk factor of the capital
structure.

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References:
Annual report. (2017). Coca cola Amatil. (Online). Retrieved on 14 May 2018 from:
https://www.ccamatil.com/-/media/Cca/Corporate/Files/Annual-Reports/2018/Annual-
Report-2017.ashx.
Bloomberg. (2018). Australian bonds and rates. (Online). Retrieved on 14 May 2018 from:
https://www.bloomberg.com/markets/rates-bonds/government-bonds/australia.
Home. (2018). Coca cola Amatil. (Online). Retrieved on 14 May 2018 from:
https://www.ccamatil.com/.
Morningstar. (2018). Coca cola Amatil. (Online). Retrieved on 14 May 2018 from:
http://financials.morningstar.com/income-statement/is.html?t=CCL&region=aus.
Reuters. (2018). Coca cola Amatil. (Online). Retrieved on 14 May 2018 from:
https://www.reuters.com/finance/stocks/overview/CCL.AX.
Yahoo Finance. (2018). Coca cola Amatil. (Online). Retrieved on 14 May 2018 from:
https://finance.yahoo.com/quote/CCL.AX?ltr=1.

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Appendix:
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.407276
R Square 0.165874
Adjusted R
Square 0.151493
Standard Error 0.050895
Observations 60
ANOVA
df SS MS F
Significanc
e F
Regression 1 0.029877
0.02987
7
11.5338
7 0.001239
Residual 58 0.150239 0.00259
Total 59 0.180116
Coefficient
s
Standard
Error t Stat P-value Lower 95%
Intercept -0.00166 0.006646 -0.24983
0.80360
4 -0.01496
X Variable 1 0.720626 0.212189
3.39615
5
0.00123
9 0.295884