The Capital Structure Of Myer Holding Limited Company (Research Paper Sample)

Name
Course Details
Instructor
Date
2000 words
Table of Contents TOC \o "1-3" \h \z \u Introduction. PAGEREF _Toc461698997 \h 3Myer Company profile PAGEREF _Toc461698998 \h 3Myer’s Capital Structure PAGEREF _Toc461698999 \h 4Financial Decision PAGEREF _Toc461699000 \h 7Conclusion PAGEREF _Toc461699001 \h 9References PAGEREF _Toc461699002 \h 10
Capital Structure
Introduction.
Capital structure of a company is the how the company finances its general operation and investments by using various sources of funds. In particular, it is the way in which a given company finances it assets through combination of debts, equity and hybrid security CITATION Bre11 \l 1033 (Brealey, Myer, & Allen, 2011). Debts normally comes in form of long term notes or bond issues while equity can be classified as retained earnings, preferred stock or common stock. The capital structure of a company can be a composition of short-term debts, long term debts, preferred equity and common equity CITATION Mye84 \l 1033 (Myers & Majluf, 1984). When financial analysts refers to capital structure of a company or business, they are mostly referring to the company’s debt to equity ratios that provides the insight of how risky a company is in taking certain business venture of investments.
In this case, we are going to analyze the capital structure of Myer Holding limited Company and determine the best approach that the company will use in order to finance its new investment in the homeware industry segment that is estimated to cost AUD 100 million. There are three options for the firm to choose from which include: using its retained earnings, issuing of additional shares or a 20 year bond to finance the new investment and the last options the company has is to request a term loan facility from a bank which typically matures in five years.
Myer Company profile.
Myer Holding Limited is a retail company that is based in Australia. The company is involved in the operation of the Myer store department business. It has a wide network of store that include a footprint of about sixty stores in retail location across Australia CITATION Tre15 \l 1033 (Treasury, 2015). The company deals in various products which include menswear, women’s wear; miss shop (youth); intimate apparel; beauty, fragrance and cosmetics; home ware; electrical goods; toys; handbag and accessories; footwear and general merchandise. In addition to its online stores and physical stores, the company owns sass and bide which is a women swear designer brand. This range is available from Myer store, boutique, online store and oversea retailers.
The company also undertake other activities outside the retail business through its sass & bride, subsidies and FSS retail pty ltd. The company’s primary store rival or competitor is David jones which also offer the same products and services in a department store business CITATION Tre15 \l 1033 (Treasury, 2015). Myer has for a long time been the largest department store by store count and revenue in Australia. As per the balance sheet of 2015, the company has a total current asset of AUD 480 million and a total non- current asset of 1406 million which gives it a total asset of AUD 1887 million.
Myer’s Capital Structure
Capital structure usually defines the source of funds company uses for new business investment or acquiring assets that produces income. One measure that companies use of the balance between funding sources is a leverage metric. Leverage is the total debt to equity ratio or simply referred to as the debt ratio CITATION Inv15 \l 1033 (Investopedia, 2015). This can be simplified as the B/V where B is the total debt of the company and V is the total equity of the company.
To calculate the total to debt ratio of Myer Company we shall analyze the entries on its balance sheet. From the company’s balance sheet provided for the year ending 01/07/2015, the total liability amounted to 1024 million and the total equity of the company amounted to 863 CITATION Blo16 \l 1033 (Bloomberg, 2016). From this balance sheet entries we can calculated the debt to equity ratio by finding the ratio between the total liabilities and the total stakeholders equity as shown below.
Total debt to equity ratio (B/V)
B/V = Total liability/ Total equity
AUD 1024000000/ AUD 863000000
1.187
According to corporate financial system analysis, the higher the total debt to equity ratio, the higher the degree of leverage in the financial structure of the company. In the calculation above we can observe that Myer has a high leverage. A higher leverage will have several implication for the company. This means that the company’s financing strongly depends on debt. The average financial leverage for Myer Company has been gradually decreasing since the year 2009 as shown in the graph below.
Profitability

2006-July7

2007-July7

2008-July7

2009-July7

2010-July7

2011-July7

2012-July7

2013-July7

2014-July7

2015-July7

TTM






Asset Turnover (Average)

—

—

—

1.76

1.54

1.41

1.40

1.42

1.42

1.45

1.45


Return on Assets %

—

—

—

5.61

3.53

8.12

7.15

6.59

5.09

1.56

1.43


Financial Leverage (Average)

—

—

—

2.51

2.28

2.32

2.21

2.17

2.16

2.18

2.18



The leverage for Myer Holding has been way above 1 which means that the company has been strongly depending upon the funded debts for the past ten years. In a market structure the manner in which a firm is financed is irrelevant to its financial value. Although the company has been using high financial leverage to generate high return on their assets. Having a high financial leverage have other significant consequences for the company. When a company takes on debts to finance its assets and investments, it becomes liability to the payment on interest that comes along with the debts CITATION Bak02 \l 1033 (Baker & Wurgler, 2002). In a perfect corporate financing system, it is advisable that a company takes significant amount of debts when it is certain that the return on asset will be higher that the payable interest on loan. For the case of Myer holding, there leverage has been reducing gradually over the past 10 years which shows that their return on assets has been more than the interest they pay for the debts.
According to the Australian financial review statistics, the financial leverage of the Myer holding has been a little bit higher that its peers in the industry. Although the margin is not very big, there is a substantial different between the leverage of Myer holding limited and that of its competitors such as David Jones. What this means is that the company is generally operating ast a higher leverage that the industry average. In normal cases, this is always an indication that the company has started to heavily rely on the debts to finance its investments which is not a good trend for the company CITATION Blo16 \l 1033 (Bloomberg, 2016).
Return on equity (ROE) is the measure on how a well a company uses investment fund to generate earning growth.
ROE= Net Income (After Tax)/ shareholder Equity.
High financial leverage that is higher than the industry leverage means that Myer holding will incur a huge debt borrowing at a lower interest rate and making use of the excess fund on high investment risks CITATION Pei15 \l 1033 (Peirson, Brown, & Howard, 2015).
Financial Decision
Australia enjoys a well-developed financial markets for most of its major products that includes debt, money, equities, derivatives and foreign exchange. These market sectors are not as big as their equivalent markets in huge economies such as or the United States (US). However, trading activity in most financial market sectors of Australia is higher than t indicated by the economic size. For example, largest market sector in the country is the foreign exchange market CITATION Pei15 \l 1033 (Peirson, Brown, & Howard, 2015). The Australian dollar (AUD) is ranked the seventh most currency that is actively traded. On a global scale, however, the country’s debt market is relatively small. Participants in the debt of Australia include investors in debt who are groups that hold their assets in terms of debt security and issuers of debts who are those that uses the market as a source of funding. Three broad groups issue debt in the Australian debt market: State/Territory governments, the Commonwealth government and corporates.
In order for the company to fund its AUD 100 million project it will have to raise funds. There are three options that the company has to raise funds for this new investment. One is to use its retain earning by spending AUD 100 million to fund the new investment. Secondly, the firm could issue a 20year bond or additional shares to finance the investment. Finally, the firm could request for a term loan from a bank that matures in five years.
From the statistics presented in the Australian Financial Review analysis, it is evident that the best approach that the company could take is to issue a 20 year bond or provide additional share to finance the homeware business segment. A bond will include borrowing money from a potential investor that for a specific period of time with periodic payments of intere...