Comparative Analysis of Sigma Healthcare and API Capital Structures

This report undertakes a comparative financial analysis of Sigma Healthcare and Australian Pharmaceutical Industries (API), focusing on their capital structures and weighted average cost of capital (WACC). The analysis begins with a comparison of the debt and equity components of each company's capital structure, revealing that Sigma Healthcare has a more balanced portfolio (40% debt, 60% equity) compared to API (16% debt, 84% equity). The report then delves into the WACC, highlighting the cost of equity, cost of debt, and tax rates for both companies across three years (2016-2018). The WACC of Sigma Healthcare is higher than that of API, indicating a higher risk profile. The report concludes that API's capital structure and WACC appear more favorable for investors. The report references financial statements from API and Sigma, as well as academic sources on capital structure and WACC.

Running Head: SIGMA AND API 0
Sigma & API

SIGMA AND API 1
Table of Contents
Comparison of the Capital Structure...............................................................................................2
Weighted Average cost of capital....................................................................................................3
References........................................................................................................................................5

SIGMA AND API 2
Comparison of the Capital Structure
Capital structure is the core component of any organization and it defines how well the
operations of the company are divided in the form of the debt and the equity. Debt comes in the
form of the long term notes payable and the bonds and the equity is classified in the form
common stock, preferred stock or retained earnings. Presently the debt of the sigma healthcare is
$793 and the equity of the Sigma Healthcare is $1201. On the other hand the Australian
Pharmaceuticals the debt is $100 and equity is 5 times that of debt which is $508 (DeAngelo &
Stulz, 2015).
Capital structure Sigma Healthcare Capital structure Australian
Pharmaceutical
s Industries
WEIGHTS WEIGHTS
DEBT 793 40% DEBT 100 16%
EQUITY 1201 60% EQUITY 508 84%
1994 100% 608 100%
From the above table it can be determined that the capital structure of the Sigma
healthcare reflects the weights of the debt and the equity in the ratio of 40% to 60%, whereas in
case of the Australian Pharmaceuticals Industries the weight of the debt and the equity is
16:84 (API, 2018). From the above information it can be reflected that the Sigma Healthcare is

SIGMA AND API 3
having a balanced portfolio and whereas the Australian Pharmaceutical Industries is more driven
towards the Equity and the risk component at the same time (Sigma, 2018).
Weighted Average cost of capital
The weighted average cost of capital is the rate at which the security holders are paid on
an average basis to finance the assets. Important factor while calculating the WACC is that the
firms’ cost of capital is determined by the external market and not by the factors of the
management. The entire rule is of the market forces. The higher the weighted average cost of
capital the risk is the high and therefore the investors will be in need of the additional funds to
subsidies the risk. The WACC of the Sigma Healthcare is 10.98%, 6.07% and 5.79% which
indicates the higher risk and whereas the WACC of the Australian Pharmaceuticals Industries
is 8.29%, 4.68% and 4.57% for the respective period of three years indicating the less risky
factor for the investors (Krüger Landier & Thesmar, 2015). Hence it can be said that the
weighted average cost of capital of the Australian Pharmaceuticals Industries is better in
comparison to the Sigma Healthcare.
WACC Sigma Healthcare Australian Pharmaceuticals Industries
2018 2017 2016 2018 2017 2016
Cost of Equity
15.00
%
6.92
%
6.51
% Cost of Equity
15.00
%
5.32
%
5.22
%
Cost of Debt 7.00%
6.92
%
6.78
% Cost of Debt 7.00%
6.12
%
5.98
%
Market value of
Equity 1201 1227 1238
Market value of
Equity 509 554 537
Market value of
Debt 793 580 555
Market value of
Debt 1008 897 913
1994 1807 1793 1517 1451 1450
Tax 30% 30% 30% Tax Rate 30% 30% 30%

SIGMA AND API 4
Rate
*Assuming tax rate to be 30%
Sigma Healthcare
2018 2017 2016
Equity * Cost of Equity
180.1
5
0.090
84.9084
0.047
80.5938
0.045
Total value 1994 1807 1793
Debt * Cost of Debt *(1-tax
rate)
38.85
7
0.019
24.8472
0.014
23.2323
0.013
Total value 1994 1807 1793
Weighted Average Cost of Capital
10.98
%
6.07
%
5.79
%
Australian Pharmaceuticals
Industries
2018 2017 2016
Equity * Cost of Equity 76.35 0.050 29.4728 0.020 28.0314 0.019
Total value 1517 1451 1450
Debt * Cost of Debt *(1-tax
rate)
49.39
2
0.033 38.4274
8
0.026 38.2181
8
0.026
Total value 1517 1451 1450
Weighted Average Cost of Capital
8.29% 4.68
%
4.57
%

SIGMA AND API 5
References
API, (2018). Financial Statements. Retrieved from
https://quotes.wsj.com/AU/XASX/API/financials
DeAngelo, H., & Stulz, R. M. (2015). Liquid-claim production, risk management, and bank
capital structure: Why high leverage is optimal for banks. Journal of Financial
Economics, 116(2), 219-236.
Krüger, P., Landier, A., & Thesmar, D. (2015). The WACC fallacy: The real effects of using a
unique discount rate. The Journal of Finance, 70(3), 1253-1285.
Sigma, (2018). Annual Financial Statements. Retrieved from
https://www.investsmart.com.au/shares/asx-sig/sigma-healthcare-limited/financials