Company Financial Policy Decision-Making Coursework (Coursework Sample)

Company Financial Policy Decision-Making
Name:
Institutional Affiliation:
* Working capital Management policies
Currently, Boral Limited operates a moderate capital management policy. It assumes a risk that is higher than the conservative policy but is lower than the restricted policy. Based on its financials, the company’s current assets were A$1803.500M in the year 2012 and A$1842.700M in the year 2013. During this time, the company was operating a conservative working capital policy, leaving room for the greatest possible risk (Shuenn & Cheng, 2007). However, the reflection of this on its profits was not impressive. From these current assets, the company managed to pull a profit of A$106.400M and A$121.100M in the year 2012 and 2013 respectively. The large amounts of current assets during the two periods called for higher interest rates. This lowered the returns on investment and contributed to low profits as compared to the other two periods that are also up for consideration. In the year 2014, the company was operating a restricted/aggressive capital management policy, using the lowest volume of current assets within the four years at A$1664.500M. This meant that it gave little room for deviations owing to unforeseen circumstances. However, this gave rise to a higher profit than was observed in the previous two years when the company was observing a conservative policy. The company turned in A$130.900M of profits after tax. This can be attributed to the lower interest rates that accompany a smaller scale of current assets, leading to a higher return on investment and higher profits. The company’s current moderate capital management policy is working best for the company. In the year 2015, the company reported its highest profits over the course of the four years at A$235.600M using moderate current assets worth A$1741.300M that is neither too aggressive nor too conservative. This policy balance helped the company to incur manageable interest rates leading to the highest return on investment and the highest profit of the four years.
* Weighted Average Cost of Capital
* Cost of Equity
g=rb
where;
r- Retained Earnings
b- Return on Equity
g- Growth
Do- Dividend per share
P- Share Price
Calculation
r= (100-58.44) %
=0.4156
b=6.69%
g=0.0669*0.4156
=0.0278
Ke= (Do /P) + g
= (0.18/6.52)+0.0278
=0.0554
=5.54%
This value indicates the return that shareholders expect to get for their investment in the company. The value is considerable at 5.54%. Based on this information, the company has an added value because its return on equity at 6.690 exceeds the cost of equity. More money is made from the equity held than is given away t shareholders as compensation for bearing the risk of the company by investing in it. This indicates that the company is able to take care of its shareholders, increasing the value of the money they have invested in the company. Based on this alone, one would say that it is a good investment. However, other factors have to be considered because the firm’s overall weighted average cost of capital is what ultimately decides whether the firm is a good investment or not.
* Weight of equity= 1-weight of debt
=1-0.63
=0.37
=37%
* Cost of Debt
Kd= (interest/debt)(1-T)
Debt=1,320,000
Interest=63,700
Tax rate=tax expense/ income before tax
=51,000/286,600
=0.178
=17.8%
Cost of debt=Kd= (51,000/1,320,800)(1-0.178)
=0.0317
=3.17%
Weight of debt=debt/aggregate sources of finance
=1,320,000/(1,320,000+764,241)
=0.63
=63%
The largest share of the company’s financing comes from debt. This weighs heavily on the company because unlike in other countries, Australia has a full dividend imputation taxation system that eliminates the preference towards debt financing. The company primarily operates in Australia and this stipulation affects its earnings and its financing avenues. This means that even though the company is financed greatly by debt, it does not get the tax benefits that would positively affect its profits. In contrast, it is not cheaper for Boral to finance itself through debt as compared to equity, yet this is the path it has chosen.
Weighted average cost of capital (WACC)
WACC= (0.37*0.0554) + (0.63*0.0317)
=0.0205+0.012
=0.0325
=3.25%
The company’s Weighted Average Cost of Capital is 3.25% and this is lesser than its return on equity of 6.690%. To a large extent, this shows that the company’s value is dwindling. From this information, the Lead Broker Team should seek to invest its money elsewhere.
* Earnings Management and Distribution Practices
Boral Limited operates under a stable dividend policy. The amount of dividends received by shareholders is generally constant but has the potential to increase from one period to the next. In the financials, the company’s dividends per share remained constant between the periods 2012 and 2013 at A$0.110. This is even after the company’s profits had increased from A$106.400 in the year 2012 to A$121.100 in the year 2013. This indicates that the firm does not give out dividends based on the movement of its profits. After this, the dividends per share increased from A$0.150 to A$0.180 in the year 2014 and 2015 respectively, again in disregard to the annual profit movements. The dividends did not increase tremendously to correspond with the large increase in the profits. Moreover, the company does not allocate its dividends based on the residual earnings left over after the firm has made the desired investments in any one period. Instead, the increase in the amount of dividends to be received by shareholders in any one period depends on the firm’s anticipated long term earnings. The dividends are only increased if the firm has the ability to sustain them in the long run based on its forecasts and estimations. Between the year 2012 and the year 2013, the company did not increase dividends to shareholders because at the time it did not feel it had the ability to sustain the dividend increase in the long run. However, after the stabilization of the firm’s profits, it was able to increase the shareholders’ dividends between 2014 and 2015. As is usually the case with firms that practice the stable dividend policy, the firm has not reduced the dividend amount due to shareholders over the four years. It would rather keep the amount constant. The result of this firm’s use of the stable dividend policy is a steady and increasing dividend payment system to the shareholders but a very fluctuating dividend payout ratio from one year to the next (Shuenn & Cheng, 2007).
* Capital Structure
The firm does not seem to have target or optimal capital structure ratios. From the financials, the firm recorded a long term debt to total assets percentage of 24.236 in the year 2012, 46.275 in the year 2013, 15.940 in 2014 and 22.518 last years. These ratios have no particular range into which they fall. They move up and down from one year to the next and this indicates that other factors other than target debt ratios are responsible for this firm’s capital structure decisions. Similarly, the firm recorded var...