Corporate Finance Report: Cann Group Ltd Cost of Capital Analysis

This report provides a comprehensive analysis of Cann Group Limited's cost of capital, as requested by the Board of CHL Health. The analysis includes the calculation of the Weighted Average Cost of Capital (WACC), examining market value weights, cost of equity and debt, and interpreting the resulting WACC of 7%. The report further delves into the company's gearing ratios, including debt-to-equity and interest coverage ratios, to assess its financial leverage and risk. It then explores relevant capital structure theories, such as the Net Income Approach and the Traditional Approach, to evaluate the company's current capital structure. Based on these analyses, the report offers recommendations to improve Cann Group Limited's capital structure and financial performance, emphasizing the need to balance debt and equity financing, and manage its operating income. The conclusion reiterates the importance of effective capital structure management for the company's growth and provides insights into the implications of its current financial position. The report concludes with a list of relevant references.

Running Head: CORPORATE FINANCE 1
Corporate Finance
(Student Name)

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Table of Contents
Introduction......................................................................................................................................3
Calculation of Weighted Average Cost of Capital..........................................................................3
Analysis of WACC Calculation.......................................................................................................4
Gearing Ratio of the Company........................................................................................................5
Capital Structure Theory..................................................................................................................6
Recommendations............................................................................................................................7
Conclusion.......................................................................................................................................7
References........................................................................................................................................8

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Introduction
Cann Group Limited is one of the established ethical leaders in emerging medical cannabis
industry of Australia. The company as established in the year 2014 as well as it is the leading
corporation to be delivered by a Cannabis Research Licence by the Australian Government’s
Office of Drug Control in the year 2017. The company is following a entirely unified business
model with association contracts capitals as well as capabilities that make possible for the
company to set up foremost locus in cultivation plant genetics, production breeding, clinical
evaluation as well as manufacturing to enable the source of the medicinal cannabis for a series of
ailments as well as medicinal circumstances (Cann Group Limited, 2019).
In the following part there will be detailed analysis of the overall performance of the company
and the manner, the company manage its assets and liabilities that play an essential role in the
business. at the end efficient recommendation will be given to the company if required.
Calculation of Weighted Average Cost of Capital
A) Market Value Weights
Market Value Weights
Debt Equity Total
Market value of equity shares ($M) 250,563,886.00
Add: Retained Earnings (10,252,801.00)
Value of debt (short term borrowings+
long term borrowings) 927,674.00

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Total 927,674.00 240,311,085.00 241,238,759.00
D. Weights 0.385% 99.62%
B) Cost of Equity and Debt
Cost of Equity: CAPM model
A. Risk free rate 2.75%
B. Market rate of return 6.6%
C. Beta 1.11
D. CAPM 7.03%
Cost of debt:
Net finance cost ($M) 8,381.00
Less: Tax @30% 2,514.30
After tax cost of debt 5,866.70

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Borrowings amount 927,674.00
After tax cost of debt (%) 0.63%
C) Weighted Average Cost of Capital
Debt
Ordinary
Shares Total
Cost of Finance 0.63% 7.03%
Market Weights 0.38% 99.62%
WACC 0.0024% 7.00% 7.00%
Analysis of WACC Calculation
While analyzing the Weighted Average Cost of Capital of the company the company has 7%
average cost of capital. The table represent that the corporation has issued huge amount of shares
in the market and has low debt ratio in its business. The borrowing capital of the company is low
that enhance the unbalanced level of debt and equity in the company. The cost of debt after tax is
0.63% which is quite low due to the reason the company has borrowed less amount from the
market and other institution. However, the cost of equity is 7.03%, it represent that the company
has issue huge number of shares in the market to raise fund for the company. The low cost of
finance and high cost of equity represent there is huge unbalanced level in the company.
moreover, the market weight of debit is 0.38% it represent the company pay less amount of

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interest in the market for borrowed amount and the market weight of the Equity is 99.62%, it
represent that the company is majorly depend on the equity shares to raise the funds.
Therefore, it can be concluded from the above calculation that the majorly source of raising fund
of the company is from Equity rather than from debt. The company borrows fewer amounts from
the market that may affect overall cost of capital. The weighted cost of capital of the company is
high that is required to be controlled by the company to lowering its overall cost of capital due to
the main reason, the company can bale to earn high earning by controlling over its cost of
capital. In the recent, the company is raising funds by issuing equity, it shows that the company
is required to distribute huge amount of profit to their shareholders that enhance the cost of
capital. Instead the company should raise its funds from source of debt as well to lowering the
sharing of profit margin. It will support the company to retain huge amount rather than to
distribute to its consumers. With the help of such manner, the company can able to manage its
funds more effectively as well as efficiently.
Gearing Ratio of the Company
Gearing Ratios 2017 2018
Debt to Equity
Ratio
Long term liabilities
/ 20567 16369
Equity
1466014
8
8587283
4
Answer: % 0.00 0.000

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1 2
Interest Coverage
Ratio
EBIT/ -2189882 -9344781
Interest Charge 549 8381
Answer: -3988.86 -1115.00
Debt Ratio
Total Debt/ 413868 927674
Total Assets
1507401
6
8680050
8
Answer: 0.027456 0.010687
Gearing ratio is one of the effective tools that measure the proposition of the borrowed fund by
the company to its equity. Such ratio helps in analyzing the fiscal menace to which the corporate
is exposed, since extreme debt that can also lead to the financial problems (Robinson et al.,
2015).

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Therefore, that majorly problem that has been faced while calculating the interest coverage ratio
is representing the effective coverage ratio. The main reason behind that is the company is facing
loss that creates challenge in calculating the interest coverage ratio. It has been found that the
company will not able to recover its interest amount for longer period due to the main reason that
the company is facing loss in its business that created issue for the company to cover its interest
amount from the market. Such issue would create great issue for the business to survive in the
marketplace that can affect global recital of the firm at greater level. The interest overage ration
of the company was -3988 in the year 2017 that covered to the certain extent in the year 2018
which was -1115. It represent that due to huge amount of loss faced by the company, it did not
able to recover its interest in an efficient manner that can affect overall performance of the
company at greater level
While analyzing the debt equity ratio of the company the company has better ratio in the year
2017 which is 0.001 as comparison to the year 2018 which is 0.0002 as well as debt ratio which
is 0.027 in the year 2017 and 0.01 in the year 2018. Therefore, in both years the company has
low borrowing and high equity that represent that the company did no able to balance its
business efficiently. The company is situated in an extremely recurring business as well as
cannot tolerate to become overstretched in the expression of a predictable slump in the sales as
well as profit.
Capital Structure Theory
Capital Structure is the combinations of all the long-term sources of the economics which
include preference share capital, debentures equity share capital, reserve and surplus, as well as
other such long-term sources of finance. It is the proportion of all the type of the capitals. It is
also known as the notch of debts in the financial or investment of corporate. There are certain
theories of capital structure which are explained in below points:
Net Income Approach
It is one of the approaches which are suggested by Durand. According to this approach, a
variation in the monetary clout would lead to adjustment in the cost of capital. If the ratio of debt

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in the capital structure upsurges then the weighted average cost of capital diminutions that help
in enhancing the value of the firm (Ghosh, 2017).
However, while analyzing the capital structure of the company the debt ratio is low which does
not represent optimal structure that enhances its cost of capital. Therefore, it is required for the
company to enhance its debt ratio to manage optimal capital structure.
Net Operating Income Approach
It is reverse of the Net Income Approach, in the absence of taxes. It believe that the market
analysis of the company and discount at particular rate is not linked with the debt-equity ratio, if
the tax evidence is assumed, it acclaims that with an upsurge in the debt in funding, WACC
decreases as well as cost of the company will twitch improving (Keefe and Yaghoubi, 2016).
The company is not earning any net operating income that created biggest issue for the company.
the company has paid taxes however, have low debt capital that enhances the cost structure of
the company
Traditional Approach
Such approach represent that cost of capital is the purpose of the capital structure. It considers in
the optimum capital structure. The optimal approach suggests that at specific debt ratio as well as
equity, the cost of capital will occur least that help in enhancing the value of the firm
In the recent, the WACC of the company is high due to the reason the majorly funding of the
company is depends on equity that occur loss of the company. Therefore, while analyzing the
cost of theory, the company should adopt traditional approach in its business. To run the business
smoothly, the company is required to adopt traditional method in which. It should adopt optimal
capital structure in its business to reduce its WACC.
Miller Approach
Such method is analogous to the Net Operating approach. It represent that the cost of capital is
autonomous of the notch of leverage as we as mixture of debt-equity proportions (Waldman and
Jensen, 2016).

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However, the company has high equity ratio that represent that the company distribute huge
amount to equity share holders that make them less or not amount to be retained for the
company. It enhances cost of capital of the company.
Recommendations
While analyzing the current capital structure of the business, it is highly suggested to the Board
that the company is required to analyze the capital structure of the firm which is high
unbalanced. The debt and equity ratio of the company represent that the company should
enhances its debt ratio. It will help the company to retain more amount for its business rather
than distributing its amount to equity shareholders that will help the company to enhance its
operating income.
Moreover, it is required for the company to concentrate over its operating income, as the
company face huge amount of loss that affected overall performance and management of the
company at greater level. Therefore, it is required for the company to borrow amount from the
market that can be invested in the required place of the company which would help them to earn
revenue from the market in more efficient manner.
Furthermore, the company is required to adopt traditional and net income theory of capital
structure to manage optimum resources in more efficient and effective manner. Therefore, with
the help of such method the company can able to manage its business more effectively and able
to earn maximum level of revenue to grow in such market.
Conclusion
From the able analysis it can be concluded that managing capital structure play a vital role for
the company to grow in the market. One of the companies Cann Group Limited was introduced
in the year 2014. The debt ratio of the company is low and the equity ratio of the company is
very high that represent that the company borrow less about from the market and raise its funds
majorly from equity shares. Therefore, the cost of capital of the company is high that create main
challenge for the company. Moreover, the company has occurred great losses that represent that
the overall capital structure of the company is not optimal. Hence, it is required for the company

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to raise its borrowing ratio that will help them to reduces its cost of capital and enhance its
performance in more efficient manner.

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References
Ardalan, K. (2017) Capital structure theory: Reconsidered. Research in International Business
and Finance, 39, pp.696-710.
Cann Group Limited. (2019) About Us [Online]. Available from:
https://www.canngrouplimited.com/ [Accessed on 15/0619)
Ghosh, A. (2017) Capital structure and firm performance.London: Routledge.
Keefe, M.O.C. and Yaghoubi, M. (2016) The influence of cash flow volatility on capital
structure and the use of debt of different maturities. Journal of Corporate Finance, 38, pp.18-36.
Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A. (2015) International financial
statement analysis. New York: John Wiley & Sons.
Waldman, D. and Jensen, E. (2016) Industrial organization: theory and practice. London:
Routledge.