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1. Requires the issue of a minimum amount and number of shares, and involve at least a certain number of shareholders
2. Requires the preparation & issue of a prospectus document outlining the terms of the issue

Strong Fundamentals and a Strong Presence

When it comes to the business of iron ore and mining, Fortescue stands as a major company that operates in the region of Pibara. It is ranked after the giant name of BHP Billiton, Rio Tinto and Woodside Petroleum. The company boasts of strong fundamentals and a strong presence that aids the functioning of the business.  The company is well known for strong policies that is in direct link to the attainment of iron ore business (Fortescue Metals Group, 2017).

Debt and equity can be treated as the major sources of finance that is present in the company’s structure and that influences the WACC of the company. the WACC of the company stands at 12.6%. The WACC of the company is composed of debentures, equity, retained earnings. This means that Fortescue does not use the cheaper source of finance. The long term sources are being used by the company because it will lead to a significant decline in the WACC. When the long term finance enhances, the WACC declines . Hence, from the computation, it can be seen that the cost of equity is greater than the cost of debt.

Weighted average cost of capital

Particular

Amount

Cost (%age)

Equivalent Capital

WACC

Debentures

5655226209

11.54%

0.172381517

2.0%

Equity

16241190780

12.80%

0.495060852

6.3%

Retained earnings

10910036401

12.80%

0.33255763

4.3%

Total

32806453390

12.6%

Total

Working- Calculation of cost of debt

Interest expenses

652626105

long term debts

5655226209

Interest expenses

11.54%

Working capital of the organization can be affected in a lot of ways including the blockage of massive resources in its stocks. Also, companies try to keep small inventories and stocks stored with them so that there may be no problem arising in the near future for debt obligations. Also, the calculation of the firm's ratio has stated that it is greater than the normal rate of 1:1 thus making it profitable in nature. Also when an analysis is made on the data of past 5 years then the ratio will be observed to have high value only. This helps us to state that every penny have been utilized by the firm in buying current assets and liabilities is very significant for the developments that may be made in the firm and future (Fortescue Metals Group, 2017). The current ratio in all the past 5 years remained more than one indicating that the company has sufficient current assets to meet the current liabilities.

The working capital of the organization can be regarded as an effective and constant highlight that can help to meet the requirements of the current liabilities and current assets at a basic level. Also, the ratio values have stated that the Fortescue Limited have been trying to safeguards its current assets so that there will be no problems arising in the future for the operation of the organization (Fortescue Metals Group, 2017). So it can be clearly stated that the organization is free from any kind of risk obstruction that may provide problems in the smooth flow of operations. The quick ratio was below one in the year 2017 however, the past year trend indicate that the company has strong liquidity and will be able to discharge the obligations. It is also very important for the organization to look after debt obligation so that the investment policies and management can be maintained properly.

A Look at Fortescue's WACC

The scale of the operations that have been carried out by the company has been stated to be very huge in nature and also the value of $10897.02 billion was reported as resources of the organization. All the smooth flow of operations that are being carried out by the company have held its investors and shareholders to be satisfied and thus helping the company in order to improve their goodwill and the reputation within the industry. It has also been observed that the company has tried to rely on the debt resources of the finance so that it can meet up to the expectations of the objectives and goals that have been set by it. This also clears the decline of the debt value from $12257.81 to $8992.72 (Fortescue Metals Group, 2017). Also, it is clear that the operating cash in hand that the company keeps with it is majorly used to satisfy the future obligations which are the positive indicator for the firm.

The calculation of the debt to equity ratio can also help in the assessment of the problems. It has also been observed that the company have relied on its debt sources of finance for a long time and used it to operate the functioning system of the organization so that the future debt obligations could have been met through interest payments. This may be a negative aspect for the stakeholders and owners of the company as it shows that less dividend will be provided to them. Also, the dependence on debt obligations by the organization is also of great concern. The company has also tried to decrease the long-term debts and current liabilities so that the debt to equity ratio can still have a value more than 0.5 which will help the company to balance the ratio in a proper manner.

The total profit that has been incurred by the company in the past 5 years has now been encountered to decrease in the year 2016.  The debt level of the company has increased meaning that the company has more of debts as compared to equity. The debt equity stands above 0.70 and this indicates that the company has relied more on debts (Fortescue Metals Group, 2017) 

The increase revenues of the firm can be the reason for the massive sales that have been made during the past few years. Also, it was witnessed that the net revenues reported a major value of increment when there was a fall observed in the debt obligations of the company. Hence the massive amounts of resources that have been utilized by the firm in order to take advantage of the small market capitalization have helped it to increase the financial measures (Gibson, 2012).

Working Capital of Fortescue

The debt equity ratio of the company is not ideal because going by the standards it should be 2:1 however, going by the computation it is seen that the debt equity ratio is not optimal and below the desired ratio. Hence, the company needs to set standard and raise the level of debt to get the utmost benefit. For an optimal structure it needs to derive two-third of the capital financing from debt and one-third from the shareholder equity.

The company is also said to meet with the needs of the future debt obligations easily because it has a lot of resources that have been stored as stocks and resources and also the interest payments that are to be paid, do not pose any major threat to it. This also clearly states that the company will not become vulnerable when the repayment of the debt all obligations are needed to be made in the form of interest payments (Carmichael & Graham, 2012). It is believed that this type of companies is having an effective structure which can be used by them in order to survive in a competitive environment thus leading it to maximize the profits.

2013

2014

2015

2016

2017

Total equity

5,698.00

8,035.00

9,797.00

11,301.00

12,637.00

Total debt

16,800.00

16,056.00

18,016.00

14,739.00

12,214.00

Debt equity ratio

0.3328909

0.3395232

0.5018199

0.5452506

0.7690056

For the purpose of ascertainment and determination of dividend policy and distribution of earnings in an organization, computation of ratio is taken into consideration. Ratio analysis forms a basis for the ascertainment of dividend policy and distribution of earnings. Dividend payout ratio is one fine example so as to determine the figures for distribution of earnings (Greene, 2018). The company’s dividend payout ratio as per the provided details have sloped upwards in the year 2013 and 2014 which means that there was the provision of dividends in these 2 years. Alternatively, the details also state that the net income of the company has a downward trend in the year 2015 which has further allowed the dividend to fall in the same year. This further means that the NI of the company is directly related to its distribution of dividend. It means that the greater the profits in a company during the year greater will be the distribution of dividend. The company has a profound dividend payout and it is on account of the rapid growth of its business (Ferris et. al, 2010). This company is apt for the investors to consider so as to employ their investments.

Australia was the first company to formulate the policy of imputation of tax in the year 1987. This highly influenced the dividend policies in every organization. This further helped in minimizing the effect of double taxation on the dividend of income. Franking credit and after-tax net credit can also help the shareholders of the organization in attaining a bigger opportunity.

Debt and Equity in Fortescue

Regular dividend policy – in this scenario, the investors get dividend at the normal rate. Such a dividend policy is possible when the company consists of regular earning.

Stable dividend policy – in this scenario, a certain sum of money is paid regularly to the shareholders. It consist of 3 types that is the constant dividend per share, the constant pay oit ratio and the stable rupee dividend.

Low regular dividend – this dividend is payment of low divided at regular intervals but the extra cash dividend is paid when there is higher earnings. Such a method supplements the low dividend payout

Smoothed dividend policy – this dividend policy is paying regular dividend by the company and it is upon the action of the company whether or not to pay dividend in any of the year.

Going by the overall discussion, it can be commented that the company should follow regular dividend as it has strong fundamentals and earning profits. Therefore, going by the trend and its operations it can be said that the company is having strong dividend history and must continue with that.

Reportedly, Fortescue has a dividend per share at $0.07 and the issued number of shares for about 3113.8 during the year 2017. Fortescue paid an aggregate dividend of about $217.966 which was determined by multiplying the dividend per share to the issued number of shares. It is seen during the year 2016 that the net income of the company has increased but the dividend has gone down the graph. It was based on the Fortescue’s variation in the context of its share prices. On account of the increments in the level of debt and fall in the same due to their squaring up, the prices of shares of the organization did not reflect a mass volatility (Laux, 2014). All such facts together indicated that all these trends are directly in line with the international scenario and the product’s performance in the market. Also, Fortescue is capable of performing its operations in the future and survive the toughest competition.

2013

2014

2015

2016

2017

Div

0.11

0.06

0.29

0.19

0.07

Div payout ratio

0.49

0.6

0.93

0.13

0.43

The key drivers of firm are the strong operations of the company. Fortescue has a strong reach and availability thereby accounting for rapid sales. The sale is the main driving force. Further, the company has kept a strong control over the operational expenses and this has led to immense support. Other driving force are the strong fundamentals together with a strong balance sheet making it a potential bet.

The Debt Equity Ratio in Fortescue

For sustaining its business operations in the future and surpass all its competitors in the industry it is substantial for every organization to pursue effective corporate governance principles and measures within its framework. In order to make Fortescue achieve long-term success, not just the Board of the company but also the management are working hard towards the vision (Flannery, 2018). Fortescue has the effective structure of corporate governance policies laid in its framework and has all the guidelines related to ASX principles and recommendations. It is also observed that the organization has fully adhered to stewardship, corporate accountability, and transparency within its framework. The procedures and policies of the organization are taken care of by a sub-committee especially appointed by Fortescue which comprises of nomination and remuneration committee, audit and risk committee and finance committee (Flannery, 2018).

The company’s board of directors comprises of executive directors and non-executive directors so as to protect the shareholder's interests. The company is able to achieve worldwide experiences, mining experiences, capital projects, etc in the presence of such corporate governance structure. The company is seen hiring employees not taking their age, gender, race, etc into consideration rather considers their skills, knowledge, attributes, and aptitudes (Ross et. al, 2014). The Board controls to regulate and monitors the performance of the top executives. With the dominance of effective and structured corporate governance, the toughest of worldwide market situations can be tackled and handled. Fortescue has legitimate and structured corporate governance which made it easier for the company to solve all the difficulties and overcome the obstacles that came in its way (Brigham & Daves, 2012). This means that the first and foremost rule for an organization is to double check its strategies that are to be formulated. It is also noticed that during 2017 there has been the appointment of many independent directors which will now be reduced as what reflected in the variations in the composition of the board. The directors are also allowed to take independent decisions and plans so as to protect the interests of its shareholders.

Fortescue has formulated certain managerial policies which have made it a stronger entity amongst all its competitors. The company has maintained its effective dividend policy as it has been providing substantial dividends to all its shareholders continuously since 5 years. There is an increment in dividends paid to shareholders every year. The profits are becoming enormous while the liabilities are getting reduced (Brigham & Daves, 2012). This reflects the inverse relationship between the dividends and liabilities of an organization. Fortescue also has a relaxed a fat cat policy along with a conservative policy in the year 2013 and 2014 as reflected in its annual report. For financing of fixed assets, current assets and temporary current assets the utilization of long-term finance sources has been noticed.

Dividend Payout Ratio in Fortescue

There has been huge debt obligation for many years that has disturbed the capital structure of the company. Comparatively, the organization had made more profits in the year 2014 over 2012 which further declined in 2015 and 2016. This signifies that the organization has been employing various strategies in these years that negatively impacted its net profits and accounted for the rise in its liabilities. Also, the utilization of debts so as to attain significant results is impacted by the accumulation of retained earnings. It is required for the organization to eliminate the use of debt sources of finance and make utilization of equity sources of finance within its framework so as to overcome the obstacles and encourage hassle-free business operations for the years to come. The interest payments accumulated over the years can also be controlled by enhancing the equity funds.

Conclusion 

Considering the above facts it can be ascertained that the portfolio of Fortescue is dicey and reflects major setback to all its business operations. This is because of the fact that the organization has been initially depending on its debt sources of finance so as to encourage smooth flow in its operations. Also, on the contrary, if Fortescue has opted for equity funds and not just rely on debt funds, the organization’s dividend policies and must not have got impacted. In order to have future developments, the organization should minimize its dependency on debt financing. The structure of the corporate governance opted by the organization makes it easier to tackle the market competition and surpass its competitors so as to sustain its business operations. This also means that it is easier for the company to take risky ventures into consideration and without any risk of survival or threats to its future existence.

References

Brigham, E. and  Daves, P. (2012)  Intermediate Financial Management.  USA: Cengage Learning.

Carmichael, D.R. and Graham, L. (2012)  Accountants Handbook. Financial Accounting and General Topics, John Wiley & Sons.

Deegan, C. M. (2011)  In Financial accounting theory. North Ryde, N.S.W: McGraw-Hill

Ferris, S.P., Noronha, G. and  Unlu, E. (2010) The more, merrier: an international analysis of the frequency of dividend payment. Journal of Business Finance and Accounting. [online]. 37(1), p. 148–70. Available from: https://doi.org/10.1111/j.1468-5957.2009.02174.x  [Accessed 25 May 2018]

Flannery, T. (2018) Benefits: A Winning Strategy in the Talent Game. Compensation and benefits review. [online].  49(1), 58-99. DOI: https://doi.org/10.1177/0886368718768630

Fortescue Metals Group. (2017) Fortescue Metal Group Annual report and accounts 2017 [Online]. Available at: https://www.fmgl.com.au/docs/default-source/default-document-library/fy2017-annual-report.pdf?sfvrsn=1f931875_2  [Accessed 25 May 2017].

Gibson, C. (2012)  Financial statement analysis. Mason, Ohio: South-Western.

Greene, R.J. (2018) The Good Kind Of Pay Discrimination. Compensation and benefits review. [online]. 49(1), p. 56-77. DOI: https://doi.org/10.1177/0886368718768628

Laux, B. (2014) Discussion of The role of revenue recognition in performance reporting.  Accounting and Business Research. [online]. 44(4),  380-382. Available from: https://www.ccsenet.org/journal/index.php/ijbm/article/viewFile/4235/3672  [Accessed 17 May 2018]

Ross, S., Christensen, M., Drew, M., Bianchi, R., Westerfield, R. And Jordan, B.(2014)

Vaitilingam, R. (2014) The Financial Times Guide to Using the Financial Pages. London: FT Prentice Hall.

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