Contingent Convertible Capital Structure -Myassignmenthelp.Com

Question: Discuss About The Contingent Convertible Capital Structure Decisions? Answer: Introduction Rivett, Australia. The company carries on the activities related to exploration of the mineral resources in Australia. The company primarily explores for the copper, silver, lead, gold, Zinc, Uranium, Platinum, thorium, earth elements and other metal in south Australian auditing South Wales (Capitalmining.com.au 2018). Ownership structure Major substantial shareholders More than 20% shareholding among the shareholders of the company no one is holding greater than 20% shares More than 5% holding of shares HSBC Custody Nominees Australia Ltd falls under the substantial shareholder as out of total shares it holds 80,000,000 shares that is, 5.28% (Capitalmining.com.au 2018). Name of main people Chairman Robert McCauley Board members Peter Torney Non-executive director Anthony Dunlop Non-executive director Peter Dykes Non-executive director Robert McCauley Executive Director James Ellingford Non-executive Director CEO Robert McCauley (Capitalmining.com.au 2018). Key ratios Return on assets (ROA) = (NPAT / Total Assets) Return on Equity (ROE) = (Net profit after tax / Ordinary equity) Debt ratio = Total liabilities / Total assets EBIT/TA * NPAT/EBIT * TA/OE = NPAT/OE EBIT/TA * NPAT/EBIT * TA/OE = -37,36,555/37,70,735 * -37,36,555/-37,36,555* 37,70,735/35,16,843 = -1.06 NPAT/OE = -37,36,555 / 35,16,843 = -1.06 Hence, it can be proved from the above that EBIT/TA * NPAT/EBIT * TA/OE = NPAT/OE Phenomenon of TA/OE It analyses the insolvency risk and leverage level of the company with the help of the total assets as compared to the owners equity. It also present the percentage of asset held by the shareholders of the company. If the ratio goes up it represent that the companys equity portion will go down and debt portion will go up (Scholes 2015). Therefore, the company may reach to unsustainable level as additional debt will increase the interest cost and will deteriorate the financial status of the company. However, various factors on which the ratio depends are industry status, present economic scenario and the assets and liability of the company. Reasons why ROE being higher than ROA The biggest factor that segregates the ROE and ROA is the financial leverage or the debt. The fundamental equation of balance sheet that is (Assets = Liabilities + Equity) represent that if the company has no debt then the total asset will be equal to total equity which in turn will increase the ROE. Apart from that, when debts are available at the rate that is lower than ROA it will increase ROE (Albul, Jaffee and Tchistyi 2015). Therefore, the interest is lower against ROA, will results into higher ROE ASX website information Monthly stock movement 2 years time period Stock movement graph Report on stock movement Looking at the above stocks movement, it is recognized that the stock of Capital Mining Limited before 2 years though started from 0.08, it fell to 0.005 that is almost to zero over the times of 2 years. It has sharp downward moving trend and will be considered as volatile. However, marketing stocks of All Ordinary Stock slowly moving upward and will be considered less volatile as compared to Capital Mining Limited. The correlation among 2 stocks are computed as -0.807. Therefore, the stocks are negatively correlated (Titman, Keown and Martin 2017). Recent announcement The company started the drilling at Scotia Cobalt Nickel Project in the Eastern area of Goldfields of WA. It is expected that the acquisition of the project will increase the share price of the company as the performance of the company will be improved. Peter Torney and Mr. Anthony Dunlop agreed to the termination from their agreement and role. There are 2 risks associated with the stock of Capital Mining Limited. 1st risk is can be diversified through investing in other stock and the 2nd one cannot be diversified as it is the market risk. Stock field Beta of Capital Mining Ltd is 2.41 Risk free rate = Rf = 4%, Market risk premium = Rm = 6% Therefore, required rate of return of the companys share = R = Rf + ( Rm Rf ) R = 4% + 2.41* (6% 4%) = 4% + 4.82% = 8.82% Conservative investment The conservative investment is the investment that gives maximum return with lowest level of risk. Generally, the conservative investors are afraid of risk and do not want to take up higher level of risks. The other type of investors can be moderate, conservative, moderately aggressive and aggressive (Brooks 2015). The type of the investors can be assessed on the basis of their risk taking approaches. From above calculation it can be recognized that the risk association that is the beta of the company is 2.41 which is quite high. Therefore, the stock of the company is not a conservative investment. WACC (weighted average cost of capital) Computation of WACC WACC = E/V * Re +D/V * Rd * (1-Tc), Where, E/V = Equity percentage in the capital structure D/V = Debt percentage in the capital structure Re = Cost of equity Rd = Rate of debt Tc = corporate tax rate It is identified from the annual report of the company that they did not have any borrowing or debt in their capital structure. Therefore, the cost of equity of the company itself will be the WACC (weighted average cost of capital). The calculated cost of equity of the company is 8.82%. Therefore, WACC of Capital Mining Limited will be 8.82% Impact of higher WACC has on management evaluation Higher WACC represents that the stock of the company is associated with higher risk and the investors need more return to absorb the higher level of risk. Another factor represented by the higher WACC is that whether the stock is able to earn more return as compared to the WACC (HA Davis and Lleo 2015). However, the higher WACC is optimized through adjustment of debt component in the capital structure. Further, the higher level of WACC will reduce the value of the company. Optimal debt structure Optimal structure for capital It is the capital structure at which the value of the company is maximized at minimum cost. It can be identified from the above table that the debt ratio of the company for the year 2015 the debt ratio of the company is 73% whereas for 2016 it is 6.7%. Therefore, the debt ratio of the company is significantly high and for 2016 is low as the ratio around 40% is considered as idea (Peirson et al. 2014). Hence, it is suggested that if the company wish to raise additional fund it shall raise through debt and not through equity. Gearing ratio To adjust the gearing ratio the company paid off their obligations and reduced the liabilities from $ 11,91,065 to $ 253,892 over the years from 2015 to 2016. Further, they increased the equity from $ 14,410,056 to $ 21,221,826. However, directors report did not depict anything regarding this. Dividend policy As it can be found from the annual report of the company that the company did not earn any positive income during last 4 years, it did not pay or declare any dividend. Further, the directors did not recommend any dividend for the year ended 2016 (Marx 2013). Recommendation It can be suggested based on the above analysis that if the risk and return aspect of the stock is taken into consideration, the stock shall not be included under the investment portfolio. The reason is that the ROA and ROE both are in negative figures as the company could not earn positive income over last 4 years. Further, stock is involved with higher risk as the beta of the company is 2.41. Further, Reference Albul, B., Jaffee, D.M. and Tchistyi, A., 2015. Contingent convertible bonds and capital structure decisions. Brooks, R., 2015.Financial management: core concepts. Pearson. Capitalmining.com.au., 2018. Home. [online] Available at: https://www.capitalmining.com.au/ [Accessed 30 Jan. 2018]. HA Davis, M. and Lleo, S., 2015.Risk-Sensitive Investment Management. Marx, J. ed., 2013.Investment management. Van Schaik. Peirson, G., Brown, R., Easton, S. and Howard, P., 2014.Business finance. McGraw-Hill Education Australia. Scholes, M.S., 2015.Taxes and business strategy. Prentice Hall. Titman, S., Keown, A.J. and Martin, J.D., 2017. Financial management: Principles and applications. Pearson.