Report On Apn Outdoor’s Capital Structure †MyAssignmenthelp.com

Question: Discuss about the Report On Apn Outdoors Capital Structure. Answer: Introduction The purpose of this report is to provide information on the capital structure of APN Outdoor Group (APO) which is listed in the ASX and advice whether the firm has been successful in maximizing wealth generation for its shareholders. The report is divided four chapters as follows. In chapter one, which is the introduction, I discuss the layout of the report. In chapter two, I discuss the approach used to analyze the capital structure of APN Outdoor Group. In chapter three, we analyze other financial ratios in respect to the company. In chapter four, I conclude my analysis by providing information on whether APNs has been successful in maximizing wealth generation for its shareholders. Analysis Of Capital Structure In order to determine the capital structure of APN, we need to analyze the following information based on the companys financial reports (Lee, Liang, Miglo, 2014). Determine APN Outdoors debt to equity ratio. Perform comparison of debt/equity ratio with other similar companies in the advertising industry. Determine APNs optimal capital structure Determine APNs Weighted Average Cost of Capital. Compare APN Outdoors capital structure over past three years. Total Debt to Equity Ratio The total debt to equity ratio measures the relationship between equity capital and debt. A high ratio suggests that a company has taken more debt and consequently, is more aggressive with a higher risk (Investopedia, 2017). In 2016, APN outdoors debt to equity was 0.67. Thus its total debt was 0.67 times its equity (Yahoo Finance, 2017). Comparison of Debt to Equity Ratio to oOH! Media Ltd A similar company is oOH! Media Ltd (OML). oOH! Media is also an advertising company that specializes in billboards (oOH! Media Ltd , 2017). The 2016 debt/equity ratio for oOH! Media was 0.65 which was slightly below APN Outdoors. Weighted Average Cost of Capital Also written as WACC, the Weighted Average Cost of Capital is the expected return on the securities for a company. WACC = Weight Debt * cost of debt *(1 corporate tax) + Weight equity *cost of equity Optimal Capital Structure Lets assume that APNs corporate tax, T is 36%. Furthermore, lets assume the pre-tax interest rates for each level of debt is given as below. % financed with debt Pre tax cost of Debt 0% 0% 10% 0% 20% 5% 30% 5% 40% 7% 50% 7% 60% 9% 70% 9% 80% 12% 90% 12% Table 1: Pre Tax Interest Rates The cost of equity can be determined from CAPM. To determine the optimal capital structure of APN Outdoor Ltd, we need to find the level of debt and equity that will result in lowest WACC. To do this we can use Hamada equation (Lee, Liang, Miglo, 2014). I.e. L= u*[ 1 + (1-T)(D/E)] Where L - beta of firm that uses debt u- beta of firm without debt T- Corporate tax D/E- debt/ equity We determine that APN Outdoors unlevered u is 0.8822. We then calculate the WACC for each level of debt (see Table 2) % financed with debt Debt/Equity Ratio Beta Cost of Equity Cost of Debt-After Tax WACC 0% - 0.88219 6.46% 0.00% 6.458% 10% 0.1111 0.94492 6.75% 0.00% 6.072% 20% 0.2500 1.02334 7.11% 3.20% 6.326% 30% 0.4286 1.12416 7.57% 3.20% 6.260% 40% 0.6667 1.25859 8.19% 4.48% 6.706% 50% 1.0000 1.44679 9.06% 4.48% 6.768% 60% 1.5000 1.72909 10.35% 5.76% 7.598% 70% 2.3333 2.19959 12.52% 5.76% 7.787% 80% 4.0000 3.14060 16.85% 7.68% 9.513% 90% 9.0000 5.96360 29.83% 7.68% 9.895% Table 2: WACC We determine the lowest WACC is 6.072%. Therefore the optimal mix that will maximize the value of APN Outdoor is 10% debt and 90% equity. Comparison APN Outdoors Capital Structure over Past Three Years From the financial reports in Yahoo Finance, we note for year 2015 and 2014, the debt/equity ratios were 0.57 and 0.68 respectively. This suggests the company had taken little debt in 2015 in comparison to 2016 and 2014. Otherwise the company was still not at its optimum capital structure. Other Key Financial Ratios Liquidity ratio These ratios determine the liquidity risk for the company. They include current ratio, quick ratio and cash ratio. In 2016, APN Outdoors had a current ratio of 1.9 and a quick ratio of 1.89 (The Wall Street Journal, 2017). A high current ratio suggests greater assurance that APNs current liabilities can be paid using its current assets, thus the company does not have a liquidity risk problem (Subramanya Wild, 2009, p. 530) Profitability Ratios These ratios measure the profitability for the company. They include return on asset and return on equity. In 2016, APN Outdoors had a return on asset of 10.63 and return on equity of 17.27. Since the ratio is high, APN is doing well (Subramanya Wild, 2009). Efficiency Ratios Efficiency Ratios measure how the company is using its assets. They include inventory turnover. In 2016, APN Outdoors had inventory turnover of 10.38. A high ratio suggests strong sales (Subramanya Wild, 2009). Conclusion- Shareholder Value Shareholder wealth maximization involves increasing the share price. One of the ways to create value in a firm is by utilizing an optimal capital structure. In the case for APN Outdoors, we can see that indeed the company is not at its optimum capital structure of 10% debt and 90% equity. However, their key ratios indicate that it is making profits and dont seem to have any liquidity risk. In conclusion, APN Outdoor Group does not appear to create maximum value for its shareholders. It should aim to minimize its cost of capital so that the firms value is maximized in the long run. Some of the ways APN can minimize its WACC include lowering its interest rates and managing its operational risks. References Investopedia. (2017). Debt/Equity Ratio. Retrieved from Investopedia: https://www.investopedia.com Lee, Z., Liang, S., Miglo, A. (2014). Capital Structure of Internet Companies: Case Study. Retrieved from https://faculty.nipissingu.ca/antonm/files/2014/06 oOH! Media Ltd . (2017). About Us. Retrieved from oOH! Media Ltd : https://www.oohmedia.com.au Subramanya, K., Wild, J. (2009). Financial Statement Analysis. New York: McGraw-Hill Irwin. The Wall Street Journal. (2017). APN Outdoor Group Ltd. Retrieved from The Wall Street Journal: https://quotes.wsj.com/AU/XASX/APO/financials/annual/balance-sheet Yahoo Finance. (2017). APN OUTDOORS LTD. Retrieved from Yahoo Finance: https://au.finance.yahoo.com