Analyzing Capital Structure of Outdoor Companies

This solved assignment delves into the financial analysis of an outdoor advertising company, focusing on its capital structure. It examines various key financial ratios, such as debt-to-asset ratio and debt-equity ratio, to assess the company's risk and stability. The analysis suggests strategies for optimizing the company's capital structure, including reducing debt and increasing equity. The importance of cost of capital in shaping a company's financial performance is also highlighted.

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Project Report: Accounting and finance

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Executive Summary
This report has been presented to identify the capital position of APN outdoor group.
This report depict about various aspects related to the company’s capital structure. This report
depict about the capital position of the company and the impact of the capital structure over
the performance of the company in terms of profitability and debt equity ratio. For analyzing
the capital structure in a better manner, it is important to analyze the capital structure of the
company.

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Contents
Introduction.......................................................................................................................4
Company overview...........................................................................................................4
Capital structure of company............................................................................................4
WACC..............................................................................................................................5
Comparison of capital structure........................................................................................6
Key financial ratio of APN...............................................................................................6
Changes into the capital structure.....................................................................................8
Evaluation.........................................................................................................................8
Cost of capital importance................................................................................................8
Alternative capital structure..............................................................................................8
References.........................................................................................................................9

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Introduction:
Capital structure of a firm plays an important role to identify the financial position,
stability and performance of the company. This report depict about the capital position of the
company and the impact of the capital structure over the performance of the company in
terms of profitability and debt equity ratio. For analyzing the capital structure in a better
manner, it is important to analyze the capital structure of the company.
Company overview:
APN outdoor group is an advertising company which helps its clients to promote their
products and services through various sources. This company is enhancing its business
rapidly through promoting and launching new services which could attract more customers to
manage the business.
Capital structure of company:
Capital structure of the company has been analyzed. The debt of the company is $ 133
million and the equity of the company is $ 269 million. This depict that the best and equity
ratio of the company is around 1:2 which depict that the company is required to enhance the
debt level to manage the performance and level of risk of the company and this could also
help the company to reduce the level of cost (Morningstar, 2017).
Capital
Structure
Price
Debt 133
Equity 269
402 0.49442

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WACC:
WACC is weighted average cost of capital which depict about the total average cost
of the company which happens when company raises the funds through various source to
meet the future expectation and invest into new projects (Bello, 2005). Through the
calculation over the WACC of the company, it has been analyzed that the debt cost of the
company is 0.02631 and cost of equity is 0.0838. The cost of debt has been calculated to
identify the total cost of the company and for calculating the equity cost of the company,
CAPM model has been calculated.
Calculation of WACC
Price Cost Weight WACC
Debt 133 0.02631579 0.330845771 0.008706468
Equity 269 0.0838 0.669154229 0.056075124
402 Kd 0.064781592
Calculation of cost of debt
Outstanding debt 133
interest rate 5
Tax rate 0.3
Kd 0.0263

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Calculation of CAPM
RF 2.40%
RM 7.00%
Beta 1.3
Required rate of return 8.380%
(Morningstar, 2017)
Comparison of capital structure:
For comparing the capital structure of the company, Amscreen group limited’s capital
structure has been analyzed. The debt of the company is $ 3460 million and the equity of the
company is $ 34984 million (Goetzmann & Kumar, 2008). This depict that the best and
equity ratio of the company is around 1:9 which depict that the company is required to
enhance the debt level to manage the performance and level of risk of the company and this
could also help the company to reduce the level of cost.
Key financial ratio of APN:
Further, various financial ratios of the company has been analyzed to identify the
financial stability, performance and the position of the company, following are some of the
key financial ratios of the company:
Financial Data
Description APN outdoor group
2016 2015
Revenue 330.00 300.00
Cost of goods sold 7.00 8.00
Gross profit 323.00 292.00
Operating profit 72.00 62.00
Net profit 48.00 41.00
Inventory 1.00 1.00
Current assets 94.00 85.00
Receivables 69.00 63.00
Current liabilities

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50.00 45.00
Payables 2.00 2.00
Equity 269.00 248.00
Total liabilities 451.00 389.00
Total assets 451.00 389.00
Description Formula APN outdoor group
2016 2015
Profitability
Net margin
Net
profit/revenues 14.55% 13.67%
Return on equity Net profit/Equity 17.84% 16.53%
Liquidity
Current ratio
Current
assets/current
liabilities 1.88 1.89
Quick Ratio
Current assets-
Inventory/current
liabilities 1.86 1.87
Efficiency
Receivables
collection period
Receivables/
Total sales*365 76.32 76.65
Payables collection
period
Payables/ Cost of
sales*365 104.29 91.25
Asset turnover
ratio
Total sales/ Total
assets 0.73 0.77
Solvency
Debt to Equity
Ratio Debt/ Equity 1.68 1.57
Debt to assets
Debt/ Total
assets 1.00 1.00

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Changes into the capital structure:
Through the capital structure ratio of the company and various key financial ratios of
the company, it has been analyzed that company is required to manage the capital structure in
such a manner that risk of the company could be reduced and the cost level of the company
could also be reduced. Company is required to decrease the level of debt more according to
the industry level so that the cost structure of the company could become more reliable.
Through last 3 years data, it is suggested to the company to reduce the debt level (Magaloni,
Diaz-Cayeros & Estévez, 2007).
Evaluation:
Through the financial ratios of the company, it has been evaluated that the position of
the company has became more stable from last 2 years. Currently the net profit and the
dividend position of the company have been enhanced and through which the investors have
attracted more to invest into this company (Guiso & Jappelli, 2008).
Cost of capital importance:
Cost of capital is the total capital which is paid by the company to the shareholders
and debt holders of the company in consideration of their amount. Company always look for
reducing the level of cost and at the same time, the risk related to the funds also is reduced.
This depicts that cost of capital of a firm plays an important role to identify the financial
position, stability and performance of the company.
Alternative capital structure:
Lastly, the capital structure of the company has been analyzed and it has been found
that the firm must enhance the level of equity and must reduce the level of debt to manage the
performance and stability of the company. The debt equity ratio of the company must be 1:7.

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References:
Morningstar. (2017). APN outdoor group limited. Retrieved from
http://financials.morningstar.com/cash-flow/cf.html?t=APO&region=aus&culture=en-
US as on 28th Sept 2017.
Bello, Z. Y. (2005). Socially responsible investing and portfolio diversification. Journal of
Financial Research, 28(1), 41-57.
Goetzmann, W. N., & Kumar, A. (2008). Equity portfolio diversification. Review of Finance,
12(3), 433-463.
Guiso, L., & Jappelli, T. (2008). Financial literacy and portfolio diversification.
Magaloni, B., Diaz-Cayeros, A., & Estévez, F. (2007). Clientelism and portfolio
diversification: a model of electoral investment with applications to Mexico. Patrons,
clients, and policies: Patterns of democratic accountability and political competition,
182-205.
Morningstar. (2017). Amscreen Group Limited. Retrieved from
http://financials.morningstar.com/balance-sheet/bs.html?
t=01299&region=hkg&culture=en-US as on 28th Sept 2017.