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Company Overview

For this task, you are required to describe and evaluate the capital structure and payout policies of For each policy area, use the following broad analysis approach:
1. Describe the policy (which may or may not be explicit) based on current and historical data.
2. Evaluate the policy, drawing on theory and practical considerations covered in the unit and applied to the company’s current characteristics and situation.


Your analysis will be mostly qualitative but some basic quantitative measures should be used in describing the company’s policies.Marks for this task will be awarded as per .This task is based on the hypothetical case information below.You are helping Masters Limited with its capital budgeting decisions. The company has a 15% weighted average cost of capital and is subject to a 30% tax rate. Masters has recently been subject to significant competition from overseas manufacturers with much lower costs. To combat this, Masters is considering a project that will see it move into a new product market considered riskier than its current operations. The CEO has asked you to undertake a financial analysis of the proposed project and present your recommendations in a short memo. As part of your financial analysis you will calculate NPV, IRR, payback period, discounted payback period and profitability index.


The project requires an upfront investment in plant and equipment of $10 million, which will be depreciated on a straight-line basis over the five-year life of the project. The equipment is not expected to have any significant salvage value at the end of its depreciable life. Consultants, who were paid $10,000 in fees, have already performed a market analysis. Sales volume is expected to be 100,000 units in the first year, grow by 10% per year in years two and three, and fall by 15% in each remaining year as demand wanes. Selling price in the first year is expected to be $100 and grow by 4% each year after that.


Various experts within Masters have forecast costs and working capital requirements related to the project. Cost of goods sold will equal 50% of sales revenues. Selling, general and administrative expenses directly related to the project (excluding depreciation) will be $1.5 million in the first year and increase by 3% per year thereafter. An upfront investment in net working capital equal to 15% of the year 1 sales revenue forecast will be required. This investment in working capital will be fully recovered at the end year 5.


If Masters goes ahead with the project, the company will set up project operations in one of the buildings it owns. This building is currently leased to another company for $100,000 per year. Prepare (1) a spreadsheet financial analysis of the proposed project and (2) a memo to the CEO that briefly explains and justifies your chosen methods and any assumptions made, summarises your findings, and presents your recommendations on the proposed project.

Company Overview

In financial terms, capital structure describes a manner through which a company could raise the funds for its assets. These sources could be a combination of equity, various securities and debt. Capital structure is the combination of liability of a company. It briefs that how could a company raise its funds to enhance the performance and overall growth of the company.

It focuses on the various sources which are used by the companies to raise the funds (Madhura, 2011). Debt could be categorized into short term debt such as bond issues and long term debt such as notes payable. On the other hand, the equity could be categorized in the form of preferred stock, retained earnings, common stock etc. the process of capital structure is quite crucial for an organization to evaluate and manage so that the new opportunities could be grabbed by the company easily as well as the investment position of the company could also be enhanced.

Additionally, payout policies are set of few guidelines and framework which could be followed by an organization to manage and decide about the dividend payout. Dividend policy is the other name of payout policy. It helps an organization to make a conclusion about the total dividend payout ratio. It evaluates that how much amount of net profit should be given to the stockholders of the company. Basically, the relevant and irrelevant policies are followed by the companies to set the dividend payout ratio.

Company overview:

Boral limited is an Australian company which operates its business at multinational level. The company mainly manufactures and supplies the building material and construction material at Australia as well as at international level. Currently, approx 16,000 employees are working with the company and the company is operating its business through 700 sites. Headquarter of the company is in Sydney, Australia. Mainly, the company is running three divisions which are Boral Australia, Boral North America and USG Boral. The main products of the company are concrete, quarry, cement, concrete placing, asphalt, hardwood, and roofing and softwood timber operations (Home, 2018)

Capital structure and dividend policies:

Capital structure explains about the debt position and equity position of an organization. In the report, capital structure information of Boral Limited has been collected and evaluated to evaluate the company’s performance and the total cost of the company. Capital structure makes it easy for the managers of the company to identify the total cost of equity and total cost of debt of the company (Kinsky, 2011). Capital structure level of the company is as follows:

Capital Structure

Total debt

2581800000

32.18%

total equity

5440500000

67.81%

8022300000

Capital Structure and Dividend Policies

(Morningstar, 2018)

It briefs that the total debt of the company is 32.18% of total funds of the company and the total equity is 67.81%. It briefs about the higher equity level than the debt level of the company. In this position, the risk of the company is lower but at the same time, the cost of the company is quite higher. The firm is required to pay dividends to the stockholders of the company. Through the study, it has been found that the company is required to maintain 4% of debt and 60% of equity to balance (Robb and Robinson, 2014).

In addition, payout policies are set of few guidelines and framework which could be followed by an organization to manage and decide about the dividend payout. It helps an organization to make a conclusion about the total dividend amount of net profit which should be given to the stockholders of the company. Basically, the relevant and irrelevant policies are followed by the companies to set the dividend payout ratio (Kaplan and Atkinson, 2015). Relevant dividend policy explains about the high dividend payout ratio, it expresses that the company is required to pay good amount of dividend to motivate and attract the investors whereas the irrelevant dividend policy express about the lower dividend payout ratio, it expresses that the company should not pay the dividend amount and must retain the profit for further expenses.

The study on the dividends of the company of last 10 years has been evaluated and it has been found that the company is following relevant dividend policy. The average payout ratio of the company in last 10 year is 75% which explains that the 75% of the net profit of the company is given to the stockholders of the company as the dividend amount (Chittenden and Derregia, 2015). Relevant dividend policy briefs that the dividends which are paid by the company to its stockholders are positive aspect for both the company and the stockholder.

This policy explains that the investors always check the dividend payout ratio of accompany before investing into the company’s stock. Though, miller and Modigliani (1961) stated in their report that an organization should reinvest the net profit in its business rather than distributing it to the stakeholders (Soltani, Nayebzadeh and Moeinaddin, 2014). The followers of relevance theory explain that the regular dividend and proper dividend reduces the level of uncertainty in the business. It further explains that due to regular dividends, the stock price of the company also enhances.

Relevant Dividend Policy

Directors of Boral limited explain that they are following the relevant dividend policy so that the uncertainty level could be reduced as well as the investors could attract more towards the company’s stock. The dividend level of the company briefs that in 2017, company has announced 24.0c dividend per share which is total of $ 281 million (ASX, 2018). It expresses that the dividend payout ratio of the company is 82% which is quite better. The stock price of the company also briefs that after dividend declaration, a growth has been seen in the stock price of the company (yahoo Finance, 2018).

The policy and the evaluation on the company explain that the relevant dividend policy has helped the company to manage and enhance the performance of the company. It has helped the company to enhance the level of the stock price as well as the growth rate of the company has also been enhanced due to great dividend payout ratio.

The above study explains that the dividend payout policy of the company is quite better. It assists the company to manage and enhance the stock performance of the company in the market. Though, the capital structure position of the company explains that company is required to make few changes into its structure to maintain the risk and the cost of the company.

 The given case briefs that an opportunity is held by you for the purpose of investment. The investment opportunity has been evaluated and measured on the basis of capital budgeting techniques. Capital budgeting techniques determine the investment opportunity on various bases such as on the basis of profits, on the basis of present value, on the basis of profitability index, total internal rate of return, total time in which inflow would be achieved back etc. (Lord, 2007) According to the case, masters limited is approaching an investment opportunity in which $ 10 million is the initial investment of the company and on the other hand, the current cost of capital of the company is 15%.

The analysis on the case explains that the cash outflow of the company would be in starting phase and the life of the machinery would be 5 years. The calculations and the analysis on the total cash flow after 5 years explains that at the end of 5 years, total cash inflow of the project would be $ 44,97,734. It briefs that the cash inflow is quite higher than the cash outflow of the company and explains that the opportunity is a better one for the purpose of investment (Burns and Walker, 2015).

Project evaluation (Calculation of total cash flows)

Year 1

Year 2

Year 3

Year 4

Year 5

Initial Outlay

  1,00,00,000

Revenues

         1,00,00,000

         1,14,40,000

         1,30,87,360

      1,15,69,226

         1,02,27,196

Expenses

          10,000

            50,00,000

            57,20,000

            65,43,680

         57,84,613

            51,13,598

Expenses

            15,00,000

            15,45,000

            15,91,350

         16,39,091

            16,88,263

EBDT

            35,00,000

            41,75,000

            49,52,330

         41,45,523

            34,25,335

Less: Depreciation

            20,00,000

            20,00,000

            20,00,000

         20,00,000

            20,00,000

EBT

            15,00,000

            21,75,000

            29,52,330

         21,45,523

            14,25,335

Less: Taxes

              4,50,000

              6,52,500

              8,85,699

           6,43,657

              4,27,600

EAT

            10,50,000

            15,22,500

            20,66,631

         15,01,866

              9,97,734

ADD: Depreciation

            20,00,000

            20,00,000

            20,00,000

         20,00,000

            20,00,000

cash flow

            30,50,000

            35,22,500

            40,66,631

         35,01,866

            29,97,734

Changes in Working capital

     15,00,000

            15,00,000

Total cash flow

            44,97,734

Investment Opportunity

Levin and Hallgren, 2017)

Though, capital budgeting techniques study has been conducted on the investment opportunity to identify that whether the investment opportunity is good for the company or not. Firstly, the net present value of the project has been evaluated and it has been found that if the company would invest into the project than the total NPV of the company would be $ 7,17,937.91 which is quite higher and explains that the current profit value of the company is $ 7,17,937. It suggests that the company should invest into the project.

Calculation of Net Present Value

Years

Cash Outflow

Cash Inflow

Factors

P.V. of Cash Inflow

P.V. of Cash Outflow

 $            -   

 $   1,15,10,000.00

 1.00

 $         1,15,10,000.00

 $         1.00

 $       30,50,000.00

 0.87

 $       26,52,173.91

 $         2.00

 $       35,22,500.00

 0.76

 $       26,63,516.07

 $         3.00

 $       40,66,631.00

 0.66

 $       26,73,875.89

 $         4.00

 $       35,01,865.83

 0.57

 $       20,02,203.16

 $         5.00

 $       44,97,734.35

0.50

 $       22,36,168.88

 $    1,22,27,937.91

 $         1,15,10,000.00

 NPV= Total Cash Inflow-Total cash outflow

 $         7,17,937.91

Further, the internal rate of return of the project has been evaluated and it has been found that if the company would invest into the project than the total IRR of the company would be 17% which is quite higher than the cost of capital of the company. It suggests that the company should invest into the project.

Calculation Of IRR

Years

Cash Outflow

Cash Inflow

Net cash inflows

0

 $     1,15,10,000.00

 $    -1,15,10,000.00

1

 $       30,50,000.00

 $        30,50,000.00

2

 $       35,22,500.00

 $        35,22,500.00

3

 $       40,66,631.00

 $        40,66,631.00

4

 $       35,01,865.83

 $        35,01,865.83

5

 $       44,97,734.35

 $        44,97,734.35

IRR

17%

(Shivaani, Jain and Yadav, 2017)

In addition, the payback period of the project has been evaluated and it has been found that if the company would invest into the project than the total outflow of the project would be got back in 3.21 years. It suggests that the company should invest into the project.

Calculation Of Payback period

Years

Cash Outflow

Cash Inflow

Cash flows

CF

0

 $     1,15,10,000.00

 $    -1,15,10,000.00

 $   -1,15,10,000.00

1

 $       30,50,000.00

 $        30,50,000.00

 $      -84,60,000.00

2

 $       35,22,500.00

 $        35,22,500.00

 $      -49,37,500.00

3

 $       40,66,631.00

 $        40,66,631.00

 $        -8,70,869.00

4

 $       35,01,865.83

 $        35,01,865.83

 $        26,30,996.83

5

 $       44,97,734.35

 $        44,97,734.35

 $        71,28,731.18

3.21

More, the discounted payback period of the project has been evaluated and it has been found that if the company would invest into the project than the total outflow of the project would be got back in 4.76 years which means the total outflow would be get back in 4.76 years. It suggests that the company should invest into the project.

Calculation Of discounted Payback period

Years

Cash Outflow

Cash Inflow

PV factor

P.V.

CF

0

 $   -1,15,10,000.00

1.000

 $   -1,15,10,000.00

 $       -1,15,10,000.00

1

 $       30,50,000.00

0.870

 $        26,52,173.91

 $          -88,57,826.09

2

 $       35,22,500.00

0.756

 $        26,63,516.07

 $          -61,94,310.02

3

 $       40,66,631.00

0.658

 $        26,73,875.89

 $          -35,20,434.13

4

 $       35,01,865.83

0.572

 $        20,02,203.16

 $          -15,18,230.97

5

 $       44,97,734.35

0.497

 $        22,36,168.88

 $              7,17,937.91

4.76

Lastly, the profitability index of the project has been evaluated and it has been found that the profitability index of the project is 6.2%. It suggests that the company should invest into the project.

Calculation of profitability index

Years

Cash Outflow

Cash Inflow

PV factor

P.V.

0

 $   -1,15,10,000.00

                         1.00

 $   -1,15,10,000.00

1

 $       30,50,000.00

                         0.87

 $        26,52,173.91

2

 $       35,22,500.00

                         0.76

 $        26,63,516.07

3

 $       40,66,631.00

                         0.66

 $        26,73,875.89

4

 $       35,01,865.83

                         0.57

 $        20,02,203.16

5

 $       44,97,734.35

                         0.50

 $        22,36,168.88

 $          7,17,937.91

PI= Total Cash Inflow/Initial Investment

0.062

Hence, according to the study on various capital budgeting techniques of the project, it has been evaluated that the investment into this project would offer huge returns to the company as well as the return is also higher than the cost of the company. Thus the Masters limited is suggested to invest into the project. This opportunity would also enhance the competitive position of the company.

References:

Annual Report. 2017. Boral Limited. [Online]. Available at: https://www.boral.com/sites/corporate/files/media/field_document/Boral-Annual-Report-2017.pdf [Retrieved on 5th April 2018].  

ASX. 2018. Boral Limited. [Online]. Available at: https://www.asx.com.au/asx/share-price-research/company/BLD [Retrieved on 5th April 2018].

Burns, R. and Walker, J., 2015. Capital budgeting surveys: the future is now.

Chittenden, F. and Derregia, M., 2015. Uncertainty, irreversibility and the use of ‘rules of thumb’in capital budgeting. The British Accounting Review, 47(3), pp.225-236.

Home. 2018. Boral Limited. [Online]. Available at: https://www.boral.com.au/ [Retrieved on 5th April 2018].  

Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.

Kinsky, R. 2011. Charting Made Simple: A Beginner's Guide to Technical Analysis. John Wiley & Sons.

Levin, V. and Hallgren, A., 2017. The choice of capital budgeting techniques: a human capital approach.

Lord, B.R., 2007. Strategic management accounting. Issues in Management Accounting, 3.

Madura, J. 2011. International financial management. Cengage Learning.

Miller, M. and Modigliani, F. 1961. Dividend policy, growth and the valuation of shares. Chcago Journals, Vol 4.p.p. 411-433.

Morningstar. 2018. Boral Limited. [Online]. Available at: https://financials.morningstar.com/balance-sheet/bs.html?t=BLD&region=aus&culture=en-US [Retrieved on 5th April 2018].  

Robb, A.M. and Robinson, D.T., 2014. The capital structure decisions of new firms. The Review of Financial Studies, 27(1), pp.153-179.

Shivaani, M.V., Jain, P.K. and Yadav, S.S., 2017. Perceptual Mapping of Capital Budgeting Techniques: Empirical Evidence from Corporate Enterprises in India. Research Bulletin, 42(4), pp.106-112.

Soltani, S., Nayebzadeh, S. and Moeinaddin, M., 2014. The Impact Examination of the Techniques of Management Accounting on the Performance of Tile Companies of Yazd. International Journal of Academic Research in Accounting, Finance and Management Sciences, 4(1), pp.382-389.

Yahoo finance. 2018. Boral Limited. [Online]. Available at: https://finance.yahoo.com/quote/bld.ax?ltr=1 [Retrieved on 5th April 2018].

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