Corporate Finance: Capital Structure

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Capital Structure代写 Capital structure analysis is a critical function not only to the investors but also to the managers make investment decisions.

 

 

 

Synopsis  Capital Structure代写

Capital structure analysis is a critical function not only to the investors but also to the managers make investment decisions. This report looks in detail at the five-years Abacus Property Group annual financial reports to explain its capital structure, trend, actions, and impacts of its activities to the capital. In so doing, the total debt to total equity ratio is calculated to measure the creditworthiness of the company. The analysis details how Abacus funds its operations, capital expenditure, acquisitions, and other investments. The critical analysis help in better understanding the company as well as the impact of the capital decision the management made over the five years.

Introduction  Capital Structure代写

Abacus Property Group is a real estate company operating in Australia and has a head office in Sydney. The company is one of the largest real estate investments in Australia. The primary functions of the company include property developments, both office, retail and industrial, as well as funding the property development. The market segments that Abacus operates are property, storage, property investments, among others.

Company Valuation  Capital Structure代写

Current State of Company’s Capital Structure

Abacus Property group manages its capital requirements through debt and equity financing. The group uses capital management to ensure its subsidiaries comply with their constitution requirements and trust deeds. The debt/equity mix is part of the company’s strategic plan. Besides its keeping track of actual performance against performance, the compay carries out capital review to ensure its sufficiency and adequacy in achieving the company goals.  Capital Structure代写**范文

The ratio is an indication that shareholders finance more than 55 percent of the company’s investments. The company can be able to get more debt financing for its investments. It also means the company will not incur any costs to secure bank loans. According to Gallo (2015), is a financial ratio that compares the capital contributed by the creditors and the finance provided by the shareholders. The rate shows the relationship between the fraction of the total assets that have funded by the shareholders. The debt to equity ratio indicates how a company uses debt.

Debts include Abacus’s current and long-term liabilities.  Capital Structure代写

Current liabilities are the debts that the company intends to settle in less or one year. Long term liabilities are the debts that the company is expected to repay in more than one year. Equity, on the other hand, represents the combination of shareholder’s investment, the company retained earnings, par value of stocks, and contributed capital above par value.

The total capital for the year ended June 2018 was 2,795,617 and constituted total liabilities and total equity (Abacus Property Group. 2018a p. 40). That is:

Capital = 1,916,702 + 878,915 = 2,795,617

Company liabilities come from both current and non-current liabilities. Current liabilities include Trade and other payables, Interest-bearing loans and borrowings, Derivatives at fair value, Income tax payable, and others and amount to $ 156,408. Non-current liabilities are made up of Interest-bearing loans and borrowings, Derivatives at fair value, Deferred tax liabilities, and others and amount to $ 722,507. The difference between total assets and total liabilities makes up the total equity of 1,916,702.   Capital Structure代写**范文

Total Debt to Total Equity is 878,915/1,916,702 * 100 = 45.9%

Historical Trend of the Capital Structure  Capital Structure代写

Capital Structure代写
Capital Structure代写

a. 2017 capital structure

The total capital was $2,436,670 and constituted of the total equity of $ 1,814,621 and total liabilities of $ 622,049 (Abacus Property Group. 2018b p. 36). Therefore, the total debt to total equity ratio is $ 622,049/1,814,621* 100 = 34.3%. The ratio indicates that the company has more investor financing than debt financing. Thus, the company has higher creditworthiness and likely to pay lower interest rates due to its ability to repay debts.   Capital Structure代写**范文

b. 2016 capital structure

The total capital was $ 2,450,290 and constituted of the total equity of $ 1,559,277 and total liabilities of $ 891,013 (Abacus Property Group. 2016c p. 35). Therefore, the total debt to total equity ratio is 891,013/1,559,277 * 100 = 57.1%. The ratio indicates that the creditors provide 57.1 percent for each dollar investment provided by stakeholders to finance the assets. Creditors are contributing more to the investment than required and hence, the company likely to pay more to secure bank loans and other debts.

c. 2015 capital structure

The total capital was $ 2,137,247 and constituted of the total equity of $ 1,438,128 and total liabilities of $ 699,119 (Abacus Property Group. 2018d p.60). Therefore, the total debt to total equity ratio is 699,119/1,438,128 *100 = 48.6%. The ratio indicates that the creditors provide 48.6 percent for each dollar investment provided by stakeholders to finance the assets.  Capital Structure代写**范文

d. 2014 capital structure

The total capital was $ 2,079,336 and constituted of the total equity of $ 1,290,190 and total liabilities of $ 789,146 (Abacus Property Group. 2014e p. 70). Therefore, the total debt to total equity ratio is 789,146/1,290,190 * 100 = 61.2%. The ratio indicates that the creditors provide 61.2% percent while investor contributes 38.8%.

Critical Analysis  Capital Structure代写

Graph of total liabilities, equity, and capital between 2014 and 2018

Abacus has a dynamic capital structure. According to Tamirat, Barrera, and Pennings (2017), dynamic capital is a model that managers adopt to be free to leverage any form of investment financing. Debt financing is available to the management for raising capital if and only if it cannot get more equity on reasonable terms. The use of debt financing is a signal to the investors that managers do not see a better future for the company. The total liability, equity, and capital changes from one year to another. The graph above shows dynamic of capital between 2014 and 2018. The total shareholders’ investment and hence the total capital declined tremendously from 2014. Total liabilities, on the other hand, fluctuated between $600,000 and $900,000 over the five years.

Corporate Actions that Affect Capital Structure  Capital Structure代写

Various functions resulted in changes in the capital structure. Since the company is an investment group, it holds investment properties for sale.  These properties are categorized as current assets and are deemed to change from one period to another. For instance, in 2016/2017 financial year, the company had $8000 worth of investment assets (Abacus Property Group, 2017b p. 39). The value of the assets increased to $209,606 in the 2017/2018 financial year (Abacus Property Group. 2018a p. 40). Other current assets that impact on the capital structure include inventories, property loans, cash, plan and equipment, trades, and derivatives at fair value.   Capital Structure代写**范文

On the other hand, are long-term assets. The company acquired the assets and others were amortized or disposed of. The only asset that remains unchanged over the years is intangible assets and goodwill. The company investments are partly financed by shareholders’ equity and borrowing mainly interest-bearing loans. In addition to these, is the contributed equity, reserves, and retained earnings that added or reduced total investment. Besides, the capital is affected by retained earnings, reserves, and deferred tax liabilities.

The Impacts of the Actions  Capital Structure代写

The decisions made regarding investments, borrowing, and contributions have impact on the capital structure. Any investment plan by the company had a corresponding financial implication. For instance, the payment for the purchase of property and investment can either be financed by equity or debt. The management is free to go for debt financing if they have exhausted equity financing options.

Managers have to take caution when borrowing not to borrow much than required or too little that the company makes insignificant investment progress. Borrowing is a sign to the shareholders that the company is not performing well. In this case, if the debt financing is high the total debt to total equity ratio will be high and hence negatively affect the company’s creditworthiness or ability to access financial assistance. Additionally, the management can decide to retain the earnings, then shareholders’ equity increase with the same margin.   Capital Structure代写**范文

However, other actions reduce the amount of equity. The interest payments, security acquisition rights, distribution of security to shareholders, and acquisition of units in subsidiary reduce the total equity.

The Reason for Taking the Actions  Capital Structure代写

There are various reasons that Abacus had for taking actions that changed its capital structure. The different sources of capital financing are antagonistic to each other. It is the role of finance manager to adopt the most suitable pattern of capital structure by making reasonable compromises in the face of conflicting options such as risk, timing, and cost we well as risk as associated with them. Regarding the Abacus Property group, the compromises are made in consideration of the economic characteristics and conditions and situation of the company. Some of the reasons include:

a. State of capital policy: The interest rates go down when the stock market is likely to be plunged in a bearish state. Hence, the management may take advantage of cheaper debt by increasing borrowing.

b. Taxation policy: The existing tax provisions make debt financing more advantageous other actions reduce stock capital. Interests on bonds are tax-deductible expenses, whereas divided is the object in tax ratio.

c. Cyclical variations: Abacus deals with real estate projects and other subsidiaries that can result in wider fluctuations in sales. A loss in sales affects the shareholders’ equity.

d. Size of the investment undertaking: The company undertakes a large investment project in real estate. These projects need large amounts of financing that stakeholders may not take. Thus, opting for debt financing is the only option available.

e. Stability of the earning: The greater ability of Abacus investments, the company needed to leverage its ability to take long-term debts with fewer risks.

f. Credit standing: Abacus has been having a high credit standing and hence has a greater ability to adjust sources of funds towards or downwards in response to changes in the need for funds.

Capital Structure代写
Capital Structure代写

References  Capital Structure代写

Abacus Property Group. 2018a. Annual Financial Report, 2018. Available from http://www.annualreports.com/HostedData/AnnualReports/PDF/ASX_ABP_2018.pdf (Accessed 6 October 2019)

Abacus Property Group. 2017b. Annual Financial Report, 2017. Available from https://www.abacusproperty.com.au/sites/default/files/resources/files/3239_ap_FS_APG_Report_ASX_FY17_FINAL.pdf (Accessed 6 October 2019)

Abacus Property Group. 2016c. Annual Financial Report, 2016. Available from https://www.abacusproperty.com.au/sites/default/files/2016%20Financial%20Annual%20Report_website%20static%20report%20with%20covers.pdf (Accessed 6 October 2019)

Abacus Property Group. 2015d. Annual Report, 2015. Available from http://www.abacusreports.com.au/AR2015/files/assets/basic-html/index.html#1 (Accessed 6 October 2019)

Abacus Property Group. 2014e. Nature of Business: Abacus Annual Report 2014. Available from http://www.abacusreports.com.au/AR2014/files/assets/basic-html/index.html#1 (Accessed 6 October 2019)

Gallo, A. 2015. A Refresher on Debt-to-Equity Ratio. Available from https://hbr.org/2015/07/a-refresher-on-debt-to-equity-ratio?cm_sp=Article-_-Links-_-Comment. (Accessed 6 October 2019)

Tamirat, A.S., Barrera, A.T., and Pennings, J.M., 2017. Dynamic Capital Structure: Dynamics, Determinants, and Speed of Adjustment.

 

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