Financial Analysis of Schaffer Corp Ltd: Capital Structure Report

This report provides a comprehensive financial analysis of Schaffer Corp Ltd, evaluating its capital structure, cost of debt, cost of equity, and weighted average cost of capital (WACC). The report examines the company's short-term and long-term debts, assessing the consistency of its debt structure and comparing it to industry averages. It computes the cost of debt and equity using CAPM, evaluates the company's revenue, earnings, EPS, dividends, and growth expectations, and calculates the price-to-earnings (P/E) ratio. The analysis includes a market analysis, current literature search, and a discussion of the company's uniqueness. Furthermore, the report delves into the WACC calculation, explaining the role of tax rates and addressing the inclusion of current liabilities in the cost of capital. It also explores how Schaffer Corp Ltd uses WACC in investment decisions and identifies an ideal capital structure for the company considering economic circumstances. The report concludes with a summary of key findings and recommendations based on the financial data and market analysis provided.

RUNNING HEAD: Schaffer Corp Ltd
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Name of the student
Topic
University name

Schaffer Corp Ltd
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Executive summary
This report has shown why effective capital structure is required to maintain in the
business to make effective business functioning. There are WACC and capital structure of
company has been discussed.

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Table of Contents
Executive summary............................................................................................................2
This report has shown why effective capital structure is required to maintain in the
business to make effective business functioning. There are WACC and capital structure of
company has been discussed.........................................................................................................2
Introduction.......................................................................................................................5
Answer to question-1.........................................................................................................5
Short term and long term debts of company...................................................................5
Consistency of debt structure of company.....................................................................6
Company and industry operates its debt to influence the proportion of short-term to
long-term debts.......................................................................................................................... 7
Computation of cost of debt...........................................................................................8
Answer to question no-2....................................................................................................9
Company’s cost of equity...............................................................................................9
Evaluate and discuss your company’s revenue, earnings, EPS, dividends and growth
Expectations...............................................................................................................................9
Growth expectation of company..................................................................................10
Computation of PE ratio.............................................................................................. 11
Comparable value........................................................................................................ 12

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Additional data and information would be preferred to value of the assets..................14
Answer to question no-3..................................................................................................15
Computation of weighted average cost of capital.........................................................15
Explanation of tax rate in relation to WACC...............................................................15
Why there is difference in cost of debt and cost of equity............................................15
Should current liabilities be included in cost of capital?..............................................16
Major value of the WACC calculation.........................................................................16
Scaffer Corp Ltd has used WACC in investment decision...........................................17
Capital structure of company with the relevancy of the industry.................................17
Capital structure and what economic circumstances....................................................18
Answer to question-4.......................................................................................................19
Market analysis............................................................................................................19
Current literature search...............................................................................................19
Uniqueness of Scaffer Corp Ltd...................................................................................19
Conclusion........................................................................................................................20
References....................................................................................................................... 21

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Introduction
With the increasing changes of financial analysis and effective business functioning, it is
considered that financial analysis tools should be used to evaluate the viability of company’s
financial performance. This report has shown why effective capital structure is required to
maintain in the business to make effective business functioning.
Present description of Schaffer Corp Ltd
it is diversified industrial company that is indulged in providing operating automotive leather and
property. This company has been running international business.
Answer to question-1
Short term and long term debts of company
Scaffer Corp Ltd Company has stable short term debt in both years of AUD $ 15 million
in 2016 and 2017. It shows that company has moved to raise its finance from equity capital and
long term debt (Scaffer Corp Ltd 2016).
Particular 2016 2017
Industrial
average debt
AUD in Million
AUD in
Million AUD in Million
Short term debts 15 15 18

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Long term debts 45 40 46
IN addition to this, long term debt of Scaffer Corp Ltd was 45 which decreased to 40.
However, the industrial average long term debt is AUD $ 46 million which is far more as
compared to Scaffer Corp Ltd long term debt. This has shown that company has maintained very
low level of financial leverage in business. This reduces the financial leverage and risk
associated with it (Scaffer Corp Ltd 2016).
Consistency of debt structure of company
The debt structure of Scaffer Corp Ltd is stable in short term long in 2017 and its long term debt
has gone down by AUD$ 5 million in 2017. In addition to this, industry average total debts of
company is 64 which is comparatively very high as compared to the debt structure of Scaffer
Corp Ltd. The equity capital of company was 131 in 2016 which decreased to 129. However, the
equity capital of industry average is 113 which show that company has maintained higher equity
capital which will surely increase the overall cost of capital (Scaffer Corp Ltd 2016).
Particular 2016 2017 industry average capital structure
$"000 $"000
Total debts 60 55 64

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Equity share capital 71 74 68
Total capital 131 129 113
On the other hand, the industry debt to equity structure is around 113. It has been reflected AUD
$ 113 million is the average industrial capital. It has been shown that company should increase
its overall capital (Scaffer Corp Ltd 2016).
Company and industry operates its debt to influence the proportion of short-term to
long-term debts
Scaffer Corp Ltd has managed effective capital structure as compared to its industry debt
to capital. It has been evaluated that Scaffer Corp Ltd has maintained stable short term debt. But
industrial short term debt is AUD $ 64 million which is 400% time more as compared to data
shown by Scaffer Corp Ltd. Long term debts of Scaffer Corp Ltd was 45 which decreased by
AUD $ 5 million in 2017. In addition to this, company has maintained AUD $ 18 million less
long term debt as compared to its industry average debt.
Particular 2016 2017
Industrial average
debt
$"000 $"000 $"000
Short term debts 15 15 64

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Long term debts 45 40 68
(Bloomberg, 2017).
Computation of cost of debt
Computation of cost of debt is 5%
Computation of cost of debt Amount
Interest payment 3
Long term debt and short term
debt 60
Tax payment 30%
Cost of debt 5%
(Scaffer Corp Ltd 2016).

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Answer to question no-2
Company’s cost of equity
Cost of equity – It is the amount of cost which is given by company to its shareholders for using
their money in business.
Computation of cost of equity of company
CAPM method
RF 1.58
RM -3%
Beta 0.19
Cost of equity 127%
(Bloomberg, 2017).
Evaluate and discuss your company’s revenue, earnings, EPS, dividends and growth
Expectations.
It is considered that company has increased its revenue by AUD $ 3 million as compared
to its last year data. In addition to this, net profit of company has been stable since last year. In

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addition to this, company has paid AUD $ 5 million dividend in both years that reflects that
company has been creating value for its shareholders investment (Bloomberg, 2017).
Particular (AUD in million) 2016 2017
Revenue 208 210
Earning 6 6
EPS 0.42 0.41
Dividend 5 5
(Bloomberg, 2017).
Growth expectation of company
After evaluating all the data, it could be inferred that as compared to last 10 years,
company has increased its overall revenue by 100%. It has been observed that company will
increase the overall revenue by 100% in 2024.
Growth Expectation
Amount of revenue based on
trend
2014 253

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2015 242
2016 245
2017 258
2018 279
2019 275.8
2020 282.6
2021 295.3733333
2022 304.4133333
2023 313.4533333
2024 322.4933333
Computation of PE ratio
Computation of PE ratio

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EPS of the company
0.4
1
MPS of Company
16.
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PE ratio 40
Comparable value
In this industry PE ratio has been taken into consideration to identify the expected market
price of the share of company (Bloomberg, 2017).
PE Multiple Valuation
PE ratio of Competitor 70
EPS of the company 0.41
MPS of Company 28.7
Computation of PE ratio of company