Capital Structure and Financial Analysis

This assignment analyzes the financial health and performance of Capital Mining. It examines key aspects like capital structure (debt ratio and gearing ratio), dividend policy, profitability (ROA & ROE), and risk (beta). The analysis culminates in an investment recommendation based on the company's financial performance and risk profile.

Running head: FINANCE FOR BUSINESS - MASTERS
Finance for business – Masters
Name of the student
Name of the university
Author note

FINANCE FOR BUSINESS – MASTERS 1
1. Description of Capital Mining Limited
Capital Mining Limited was formed in 2003 and the company is based in
Rivett, Australia. The company carries on the activities related to exploration of the
mineral resources in Australia. The company primarily explores for the copper, silver,
lead, gold, Zinc, Uranium, Platinum, thorium, earth elements and other metal in south
Australian and South Wales (Capitalmining.com.au 2018).
2. Ownership structure
i) Major substantial shareholders
 More than 20% shareholding – among the shareholders of the company no one
is holding greater than 20% shares
 More than 5% holding of shares – “HSBC Custody Nominees Australia Ltd”
falls under the substantial shareholder as out of total shares it holds 80,000,000
shares that is, 5.28% (Capitalmining.com.au 2018).
ii) Name of main people
 Chairman – Robert McCauley
 Board members
 Peter Torney – Non-executive director
 Anthony Dunlop – Non-executive director
 Peter Dykes – Non-executive director
 Robert McCauley – Executive Director
 James Ellingford – Non-executive Director
 CEO – Robert McCauley (Capitalmining.com.au 2018).

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3. Key ratios
i. Return on assets (ROA) = (NPAT / Total Assets)
Return on Equity (ROE) = (Net profit after tax / Ordinary equity)
Debt ratio = Total liabilities / Total assets
EBIT/TA * NPAT/EBIT * TA/OE = NPAT/OE
EBIT/TA * NPAT/EBIT * TA/OE = -37,36,555/37,70,735 * -37,36,555/-
37,36,555* 37,70,735/35,16,843 = -1.06
NPAT/OE = -37,36,555 / 35,16,843 = -1.06
Hence, it can be proved from the above that –
EBIT/TA * NPAT/EBIT * TA/OE = NPAT/OE
ii. Phenomenon of TA/OE
It analyses the insolvency risk and leverage level of the company with the help
of the total assets as compared to the owner’s equity. It also present the percentage of
asset held by the shareholders of the company. If the ratio goes up it represent that the
company’s equity portion will go down and debt portion will go up (Scholes 2015).
Therefore, the company may reach to unsustainable level as additional debt will
increase the interest cost and will deteriorate the financial status of the company.
However, various factors on which the ratio depends are industry status, present
economic scenario and the assets and liability of the company.
iii. Reasons why ROE being higher than ROA
The biggest factor that segregates the ROE and ROA is the financial leverage or
the debt. The fundamental equation of balance sheet that is (Assets = Liabilities +

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Equity) represent that if the company has no debt then the total asset will be equal to
total equity which in turn will increase the ROE. Apart from that, when debts are
available at the rate that is lower than ROA it will increase ROE (Albul, Jaffee and
Tchistyi 2015). Therefore, the interest is lower against ROA, will results into higher
ROE
4. ASX website information
i. Monthly stock movement – 2 years time period
Stock movement graph
01/10/2015
01/12/2015
01/02/2016
01/04/2016
01/06/2016
01/08/2016
01/10/2016
01/12/2016
01/02/2017
01/04/2017
01/06/2017
01/08/2017
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
0.09
Capital Mining Limited
Adj Close
01/10/2015
01/12/2015
01/02/2016
01/04/2016
01/06/2016
01/08/2016
01/10/2016
01/12/2016
01/02/2017
01/04/2017
01/06/2017
01/08/2017
0
500
1000
1500
2000
2500
3000
All Ordinary Index
Adj Close

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ii. Report on stock movement
Looking at the above stocks movement, it is recognized that the stock of Capital
Mining Limited before 2 years though started from 0.08, it fell to 0.005 that is almost to
zero over the times of 2 years. It has sharp downward moving trend and will be
considered as volatile. However, the stocks of All Ordinary Stock slowly moving
upward and will be considered less volatile as compared to Capital Mining Limited. The
correlation among 2 stocks are computed as -0.807. Therefore, the stocks are negatively
correlated (Titman, Keown and Martin 2017).
5. Recent announcement
 The company started the drilling at Scotia Cobalt – Nickel Project in the Eastern
area of Goldfields of WA. It is expected that the acquisition of the project will
increase the share price of the company as the performance of the company will
be improved.
 Mr. Peter Torney and Mr. Anthony Dunlop agreed to the termination from their
agreement and role.
 There are 2 risks associated with the stock of Capital Mining Limited. 1st risk is
can be diversified through investing in other stock and the 2nd one cannot be
diversified as it is the market risk.
6. Stock field
i. Beta of Capital Mining Ltd is 2.41
ii. Risk free rate = Rf = 4%, Market risk premium = Rm = 6%
Therefore, required rate of return of the company’s share =
R = Rf + β ( Rm – Rf )

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R = 4% + 2.41* (6% – 4%) = 4% + 4.82% = 8.82%
iii. Conservative investment
The conservative investment is the investment that gives maximum return with
lowest level of risk. Generally, the conservative investors are afraid of risk and do not
want to take up higher level of risks. The other type of investors can be moderate,
conservative, moderately aggressive and aggressive (Brooks 2015). The type of the
investors can be assessed on the basis of their risk taking approaches. From above
calculation it can be recognized that the risk association that is the beta of the company
is 2.41 which is quite high. Therefore, the stock of the company is not a conservative
investment.
7. WACC (weighted average cost of capital)
i. Computation of WACC
WACC = E/V * Re +D/V * Rd * (1-Tc), Where,
E/V = Equity percentage in the capital structure
D/V = Debt percentage in the capital structure
Re = Cost of equity
Rd = Rate of debt
Tc = corporate tax rate
It is identified from the annual report of the company that they did not have any
borrowing or debt in their capital structure. Therefore, the cost of equity of the company
itself will be the WACC (weighted average cost of capital). The calculated cost of
equity of the company is 8.82%. Therefore, WACC of Capital Mining Limited will be
8.82%
ii. Impact of higher WACC has on management evaluation

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Higher WACC represents that the stock of the company is associated with
higher risk and the investors need more return to absorb the higher level of risk.
Another factor represented by the higher WACC is that whether the stock is able to earn
more return as compared to the WACC (HA Davis and Lleo 2015). However, the higher
WACC is optimized through adjustment of debt component in the capital structure.
Further, the higher level of WACC will reduce the value of the company.
8. Optimal debt structure
i. Optimal structure for capital
Debt ratio Total liabilities / Total assets Year 2016 = 0.067 Year 2015 = 0.73
It is the capital structure at which the value of the company is maximized at
minimum cost. It can be identified from the above table that the debt ratio of the
company for the year 2015 the debt ratio of the company is 73% whereas for 2016 it is
6.7%. Therefore, the debt ratio of the company is significantly high and for 2016 is low
as the ratio around 40% is considered as idea (Peirson et al. 2014). Hence, it is
suggested that if the company wish to raise additional fund it shall raise through debt
and not through equity.
ii. Gearing ratio
To adjust the gearing ratio the company paid off their obligations and reduced
the liabilities from $ 11,91,065 to $ 253,892 over the years from 2015 to 2016. Further,
they increased the equity from $ 14,410,056 to $ 21,221,826. However, director’s report
did not depict anything regarding this.
9. Dividend policy
As it can be found from the annual report of the company that the company did
not earn any positive income during last 4 years, it did not pay or declare any dividend.
Further, the directors did not recommend any dividend for the year ended 2016 (Marx
2013).

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10. Recommendation
It can be suggested based on the above analysis that if the risk and return aspect
of the stock is taken into consideration, the stock shall not be included under the
investment portfolio. The reason is that the ROA and ROE both are in negative figures
as the company could not earn positive income over last 4 years. Further, stock is
involved with higher risk as the beta of the company is 2.41. Further,

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Reference
Albul, B., Jaffee, D.M. and Tchistyi, A., 2015. Contingent convertible bonds and capital
structure decisions.
Brooks, R., 2015. Financial management: core concepts. Pearson.
Capitalmining.com.au., 2018. Home. [online] Available at:
http://www.capitalmining.com.au/ [Accessed 30 Jan. 2018].
HA Davis, M. and Lleo, S., 2015. Risk-Sensitive Investment Management.
Marx, J. ed., 2013. Investment management. Van Schaik.
Peirson, G., Brown, R., Easton, S. and Howard, P., 2014. Business finance. McGraw-
Hill Education Australia.
Scholes, M.S., 2015. Taxes and business strategy. Prentice Hall.
Titman, S., Keown, A.J. and Martin, J.D., 2017. Financial management: Principles and
applications. Pearson.