Business Finance (Essay Sample)

Business Finance
Student’s Name
Institutional Affiliation
1. General Background of the firm
Bradken Limited is an international company that was founded in 1922 and is involved in manufacturing and selling of differentiated capital and consumable products (Bradken, 2014). The company mainly supplies its products to transport, mining, contract manufacturing and general industrial markets. Bradken Limited is a leading heavy engineering firm and manufactures a variety of steel and cast iron products with different masses that ranges from 0.5 Kilograms to over 25 tonnes (Bradken, 2014). It employs approximately 5, 000 individuals worldwide and operates in various countries, with a total of 57 manufacturing sites, services and sales facilities (Bradken, 2014). Bradken supplies a wide range of cast and fabricated products using four major focused divisions and branded businesses that are independent. The independently branded businesses include mineral processing, mining products, engineered products, cast metals and transport and industrial products (Bradken, 2014).
2. Capital Structure of Bradken Limited
Capital structure is the proportion of the long and short term debt and equity of the organization (Krainer, 2003). It shows how an organization finances its activities and growth through the use of funds from different sources. The debts are normally in the form of long term notes payable while equity are classified as the preferred stock, common stock or retained earnings (Cuthbertson & Nitzsche, 2005). Capital structure of an organization can be determined by its debts to equity ratio. Debt to equity ratio can provide useful information on how an organization is risky. In most cases, firms that are financed heavily by debt as opposed to equity pose greater risks to the shareholders.
Bradken Limited capital structure consists of funds from various sources. The company’s capital structure is effective and made in a manner that ensures that it safeguards the owner’s interest and continues operating as a going concern. This can ensure that the company continues to provide returns to shareholders as well as benefit the interest of other stakeholders. The company also maintains an optimal capital structure so as to enable it reduce the cost of capital. In order for Bradken Limited to be able to adjust its capital structure, it normally adjust the amounts of dividends that are paid to the shareholders, issues new shares, return capital to shareholders and sell some of its assets to reduce debts (Yahoo Finance, 2014).
2.1. The largest Funds Raised By Bradken Limited
Bradken Limited has used a number of sources to raise funds. Capital is obtained by organizations from a number of sources that includes debts, issue of shares and equity (Yahoo Finance, 2014). For the last five years Bradken Limited has been using various sources to raise funds that it uses to strengthen its business in the marketplace. The various sources of funds that the company has consistently used include contributed equity, reserves, retained earnings, debts and issue of shares. The largest funds that the company has used for the last five years include issue of shares. The company has been issuing shares to the market to various individuals interested in investing in the company. This mainly involved selling of the company’s share through stock exchange markets in various countries around the globe.
2.2. The purpose of the Funds
Capital is normally used by organization for various purposes that include increasing its presence in the market, marketing, innovation, and increasing product portfolio. The use of capital raised by an organization depends on its vision and mission as well as strategies to accomplish its aims and objectives in the market (Eiteman, Stonehill & Moffett, 2007). The main purpose for the funds raised by the company in the form of issuance of shares was to improve its capital base and thus strengthen its market position. The current business environment is characterized with intense competition where firms use various marketing strategies to gain competitive advantage. The strategies that Bradken Limited has used to gain competitive advantage in the market include merger and acquisition, innovation and expansion to new markets. The company, therefore, used the funds to expand to new markets, acquire some companies with similar business and invest in innovation so as to enable it develop new innovative products and gain significant market share.
2.3. Announcement of the News
The announcements of new information in organizations are normally associated with some changes in share prices of the company. The arrival of new information in an organization can cause some abnormal return earning (Shiller, 2003). This can be seen either through share prices or profitability of the company. The initial announcement date of the company’s strategy to strengthen its market position was done on 5th January 2012 during the release of the company’s half year financial statements (Yahoo Finance, 2014). This was the date when the company made an official release of its strategy aimed at increasing its presence in the international market so as to improve its performance.
2.4. Return Earned
The returns earned are used as a measure the company's profitability resulting from investing shareholders equity in an organization (Bojadziev & Bojadziev, 2007). Returned earned can be used to show if investment in a particular investment is successful or not. Investors can use the results obtained to know whether it is appropriate to invest in such initiative in the future. Owner's equity was a major fund that was used by the company. It also shows the amount of profit an organization earns in comparison to the total amount of the owners’ equity. Owner’s equity can be obtained from the balance sheet statement of the organization. Businesses with high return on investment are likely to obtain cash for various activities internally without borrowing (Bojadziev & Bojadziev, 2007).
In this case, shares issuance during the last two days and the first two days to the announcement of the new information are determined to establish whether or not there was a significant change. The share prices of the company for the last two days before the announcements were on average of $ 1.2 while in the first two days, the share price of the company rose to an average of $2.5. The return earned was therefore 2.5 -2.0 = $ 0.5. The return earned by the company as a result of the announcement was $ 0.5 per every share. This shows that new information motivated potential investors to purchase a share in huge numbers thereby creating high demand. The high demand of the products pushed up the share prices.
2.5. Market Return
Market Return shows the gain that the organization would have received if there was no announcement of the news. It shows the return on investment under normal market condition. Under normal condition changes in the prices of the company was expected to remain constant within the four consecutive days. The share of the company under normal market condition should have remained at $ 1.5 for the next four consecutive days. The market return in this case would have been $ 1.5 - $1.5 = 0. This implies that they would have been no changes in the share prices if there was no announcement of the news made by the company.
2.6. Comparison of Market Return and return earned
The result from the calculations shows that return earned and market returns are different. The return earned is $ 0.5 while the market return is 0. This shows that the announcement of the new information that was associated with strengthening of the company’s position in the global marketplace attracted the attention of investors. As a result, the demand for the shares of the company increased and this pushed the prices of its shares higher. The prices of the shares rose steadily from the announcement of the news as potential investors were having a feeling that the company will record strong financial performance in the future as a result of the strategies that the management announced to undertake.
2.7. Impacts of Recent Financial Crisis
The recent financial crisis was a major threat to majority of organizations. Financial crisis reduced the aggregate demand in the country. Due to a reduction of aggregate demand, the purchasing power of the consumers was eventually reduced. These caused potential investors to reduce their purchasing habits hence reduce the demand of the shares. The shares eventually declined to reach a low level as a result of global financial crisis. The company's share prices were therefore significantly affected by the recent impact of global financial crisis.
3. Valuation
Valuation of stock can be ascertained in a number of ways. Capital asset pricing model is one of the best techniques available in the market for valuing stocks. After capital price model, the next step is to determine the valuation of the stock. The method that is often used by majority of organization to determine the valuation of stock is the dividend valuation formula that is used to obtain the fair value of the company’s stock (Eiteman, Stonehill & Moffett, 2007).
In the valuation of the stock of Bradken Limited, capital asset pricing model is used.
Valuation of stock using the capital asset pricing model requires gathering of information. The information that must be obtained in order to calculate the valuation of stock through capital asset pricing model includes beta, risk free rate, company beta, dividend growth, the market risk premium, the company’s dividend and the expected dividend growth (Shefrin & Statman, 2000).
The formula for capital assets pricing model is given as:
R (rs) = rf +Bs [E (rm) – rf]. ...