Weighted average cost of capital determines the firm’s capital structure which consists of debt and equity component. The WACC is calculated by giving weights to each element and then multiplying the same with the cost of debt and cost of equity respectively. However, there are various reasons due to which the cost of capital of the firm can be different (Fernandes, 2014). In case of AGL Energy Limited, the WACC increases from 4.64% to 5.39% during the past three years that are 2015, 2016 and 2017. This is because of the high portion of equity taken by the company as compare to its debt. The changes occur in the capital are the results of fluctuations in beta factor of the entity which continues to rise over the period of past three years. This boosted up its cost of equity. Along with this, the cost of debt of AGL also rises from 4.5% to 5.0% because of the change in the amount of borrowings taken by the company over the past three years. Apart from the beta and interest expense, other factors which contribute to the fluctuations in capital are the market return and risk free rate. However, in this case both are been kept same for all the years. Same is the case with Origin Energy, company’s WACC rises from 3.47% to 4.27% during the years. However, it has high portion of debt as compare to AGL and moreover, its beta has been reduced during the past years.
Dividend policy deals with the guidelines that are to be followed by the company on the basis of which, it decides the dividend amount to be paid to the shareholders. For some investors, the relevancy of the dividend does not matter as they can purchase and sell their shares as and when they want. However, it is also true that declaration of the same do affect the share prices of the companies (Baker, 2009). Considering AGL, the company had a payout ratio of 275.76% in 2015 which became negative in 2016 and in 2017 it was reported at 61.73%. This was due to the significant reduction in the dividends paid by the company and its EPS turning negative in 2016. The company follows a regular dividend policy and the payments of the same have affected its share prices positively. Its stock prices have shown an upward trend in past years as a result of dividend declaration. In case of ORG, the dividend payout ratio was negative due to the negative EPS of the company. In addition, the company did not pay any sort of dividend last year. This shows that it follows a irregular policy and the payment of dividends has reduced its share prices in 2015 and 2016. Thus, it can be said that theories of dividend relevancy given by Walter and Gordon do applies to the patterns noticed above (Frankfurter, Wood & Wansley, 2003).
From the analysis, it will be recommended to purchase the shares of AGL Energy Limited as it pay regular dividends to its shareholders and its stock prices has also risen in the past years. Moreover, company has low debt which makes it less risky in financial terms.
Baker, H. K. (Ed.). (2009). Dividends and dividend policy (Vol. 1). John Wiley & Sons.
Fernandes, N. (2014). Finance for Executives: A practical guide for managers. NPVPublishing
Frankfurter, G., Wood, B. G., & Wansley, J. (2003). Dividend policy: Theory and practice. Elsevier.
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