Financial Management Report: Pendergast Inc. Analysis

This report provides a financial analysis of Pendergast Inc., focusing on the optimal capital structure for the company. It examines the implications of debt and equity financing, considering factors such as interest rates, tax rates, and the overall economic environment. The report discusses the benefits of incorporating debt, even though the company currently operates without it, highlighting the potential for reduced cost of capital and increased shareholder wealth. It suggests a 70% equity and 30% debt financing mix as an optimal strategy, considering the high tax rate environment the company operates in. The analysis also references relevant research on capital structure and corporate performance, supporting the recommendations made.

Running head: FINANCIAL MANAGEMENT
Financial Management
Name of the Student:
Name of the University:
Author’s Note:

1FINANCIAL MANAGEMENT
Table of Contents
Question 1..................................................................................................................................2
Question 2..................................................................................................................................2
Reference....................................................................................................................................3

2FINANCIAL MANAGEMENT
Question 1
An optimal financing structure is important for the companies in the long-term for the
sustainable development of the company. Risk and return are an important characteristics of
the firm operations but Pendergast Inc. should incorporate various changing business
conditions like demand and supply of real estate services and macro-economic services such
as rise in level of interest rates, inflation and changing business cycle. Internal factors should
also be reviewed by the company such as the liquidity position and profitability position of
the company so that the firm is able to pay-off timely with its debt. An optimal mix of debt
and equity would not drastically affect the performance and share price of the company and
can be considered as a positive move as the company operates in a high tax rate economy
(Zeitun & Tian, 2014).
Question 2
The firm has been reporting stable for the past 18 years and has no debt in the books
of account, Pendergast should considers some level of debt because of the cheaper financing
sources available at 10.2%p.a and taxation advantage it will be getting. The company is
operating at very high tax rate economy of around 40% thus leveraging will be helping the
company in getting the effective tax rate less than 40%. Thus an optimal 70% equity
financing and 30% debt financing is recommended for the firm. The overall cost of capital for
the company would be reduced for the company which will be creating wealth for the
shareholders of the firm (Robb & Robinson, 2014).

3FINANCIAL MANAGEMENT
Reference
Robb, A. M., & Robinson, D. T. (2014). The capital structure decisions of new firms. The
Review of Financial Studies, 27(1), 153-179.
Zeitun, R., & Tian, G. G. (2014). Capital structure and corporate performance: evidence from
Jordan. Australasian Accounting Business & Finance Journal, Forthcoming.