Capital structure of a company

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Capital structure of a company

  1. 1. CAPITAL STRUCTURE OF A COMPANY CASE STUDY AT SC SADELLI PRODCOM SRL AUTHOR: LUP PAULA MARIA
  2. 2. THE CAPITAL STRUCTURE “Neither a borrower nor a lender be!” (Polonius, Hamlet)  Capital can be collected by using two sources debt and equity, when a business establishes its capital structure arises the problem of how much should be debt and how much should be equity, each manager targets to get at an optimal capital structure which is hard to be achieved.
  3. 3.  Is there an optimal mix of debt and equity? If yes, what determines an optimal mix?  And what are the costs and benefits of using debt instead of equity?
  4. 4.  Is there an optimal mix of debt and equity?  An optimal capital structure is one that maximizes the firm value.  An optimal mix of debt and equity=debt-equity ratio constant.
  5. 5.  What determines an optimal capital structure? EXTERNAL FACTORS Inflation Flotation cost Market conditions Lender's attitude Legal framework INTERNAL FACTORS Tangibility Control Profitability Liquidity Company size Growth opportunities Flexibility of the company Effective tax rate
  6. 6.  What are the costs of capital structure?  The company’s cost of capital represents the cost that a company gives up as a consequence of using sources of capital to finance its investments which includes debt and equity.  The cost of capital is the cost of each component weighted by its relative market value and we have the following formula to compute weighted average cost of capital (WACC): WACC = E/V Re + D/V Rd (1 - Tc)
  7. 7. ESTIMATING COST OF EQUITY  The cost of equity is the expected return on company’s shares a company pays to its investors for assuming some risk.  When we talk about listed companies we can use to estimate the cost of equity the expected return on the company’s shares, capital asset pricing model (CAPM) and dividend discount model (DDM).
  8. 8. ESTIMATING COST OF DEBT  Debt financing=borrowing.  Attractive because of the interest paid which is tax deductible  Too much debt increases the risk of the company and makes it unattractive to investors.  Cost of debt =the interest rate paid by a company for its debts  It can also be computed by dividing the annual interest payment of the debt to its market value.
  9. 9. THEORIES CONCERNING CAPITAL STRUCTURE MODELS BASED ON AGENCY COST • Harris and Raviv (1990s) • Stulz(1990) • Jensen(1990) • Jensen and Meckling(1976) • Williamson(1988) • Diamond(1989) • Hirshleifer and Thakor(1989) • Myers(1977) • Green(1984) MODELS BASED ON ASYMMETRIC INFORMATION • Myers and Majluf(1984) • Myers(1984) • Brennan and Kraus, Constantinides and Grundy, Noe • Ross(1977) MODELS BASED ON PRODUCT/INPUT MARKET INTERACTIONS • Brander and Lewis(1986) • Maksimovic(1988)
  10. 10. CASE STUDY AT SC SADELLI PRODCOM SRL OVERVIEW  Active in the agricultural sector, involved especially in primary agricultural production.  1995 started its activity  2000 -opened the first store of plant protection products, their number increased, such that now there are 5 stores - started to sell on credit to small producers  2002 and 2003 purchased two agricultural cooperatives  2007 purchased some equipment through the implementation of projects financed with European funds.  In 2008 was purchased BETA Company
  11. 11. SWOT ANALYSIS STRENGHTS Strong market position Strong performance in cereals High quality land New technology Financial resources are available WEEKNESSES Poor image marketing Lack of reliable data and information on organic agriculture High cost of production Extension system oriented towards accessible farmers OPPORTUNITIES Strategic acquisitions The development of new technologies Governmental and EU support in policy programs for agriculture The increasing industries that are related to agriculture THREATS Economic changes Production risk Legal and regulatory changes Changes in what current competitors offer Entry of new competitors into marketplace
  12. 12. 6,927,822 3,282,252.95 3,453,236.34 9,477,679 28,699,487.56 35,531,697.41 0 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 30,000,000 35,000,000 40,000,000 45,000,000 2010 2011 2012 Total Equity and Liability TOTAL EQUITY TOTAL DEBT
  13. 13. 41.90% 39.90% 47,4% 36.70% 10.30% 8,9% 29% 62% 64% 63% 89% 91% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00% 100.00% 1/1/2010 1/1/2011 1/1/2012 Profitability and financial leverage ratios Return on Assets Return on Equity Debt ratio Debt to equity ratio
  14. 14. -20,000,000 -15,000,000 -10,000,000 -5,000,000 0 5,000,000 10,000,000 15,000,000 20,000,000 1/1/2010 1/1/2011 1/1/2012 Working and immediate capital Working capital Immediate working capital 0 1 2 3 4 5 6 7 1/1/2010 1/1/2011 1/1/2012 Current and immediate liquidity Current liquidity Immediate liquidity
  15. 15. CONCLUSION AND SUGGESTIONS CONCLUSION:  Most of the indicators are at good levels => a good management.  Under expectation results: high level of leverage ratios => the company might not have sufficient liquidity to meet its debt obligation.  The overall results proved that SC SADELLI PRODCOM has a good mix of capital, the company following an uptrend with a substantial increase in the net profit. SUGGESTIONS:  To list the company at BVB.  To improve its marketing strategy and advertise its products at a national level.  To stop increasing the level of debt financing => could bring the company to bankruptcy.  Take advantage of the numerous European funds.

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