there are three parts to the work which will need to be completed and the BT is company which the work is based on alot of numbers and calculations and good with excel and sample of a paper will be uploaded so do it according to that structure and how all the numbers are calculated tables etc done all the numbers have to accurate
Analyzing a Firm’s Current Financing Choices –
Part I – Corporate Governance and Shareholder Analysis
To analyze the corporate governance structure of the firm and assess where the power in the firm lies and the potential for conflicts of interest at the firm.
• Is this a company where there is a separation between management and ownership? If so, how responsive is management to shareholders? How are the directors compensated? Are they active and knowledgeable?
• Are managerial actions consistent with shareholder wealth maximization?
• How does this firm interact with financial markets? How do markets get information on the firm? How many financial analysts follow the firm? How heavily is the share traded?
• How does this firm view its social obligations and manage its image in society?
Framework for Analysis
In your report, discuss the following information
1. The Chief Executive Officer
• Who is the CEO of the company? How long has he or she been CEO?
• If it is a “family-run” company, is the CEO part of the family? If not, what career path did the CEO take to get to the top? (Did he or she come from within the organization or from outside?)
• How much did the CEO make last year? What form did the compensation take (salary, bonus, and option components)?
• How much equity in the company does the CEO own and in what form (shares or options)?
2. The Board of Directors
• Who is on the board of directors of the company? How long have they served
• How many of the directors are inside directors?
• How many of the directors have other connections to the firm (as suppliers,
clients, customers, etc.)?
• How many of the directors are CEOs of other companies?
• Do any of the directors have large stockholdings or represent those who do?
3. Bondholder Concerns
• Does the firm have any publicly traded debt?
• Are there are bond covenants (that you can uncover) that have been imposed
on the firm as part of the borrowing?
• Do any of the bonds issued by the firm come with special protections against
4. Financial Market Considerations
• How widely held and traded is the share? What proportion of its shares are
widely traded (floats)?
• How many analysts follow the firm?
• How much trading volume is there on this share?
5. Societal Constraints
• What does the firm say about its social responsibilities?
• Does the firm have a particularly good or bad reputation as a corporate citizen?
• If it does, how has it earned this reputation?
• If the firm has been a recent target of social criticism, how has it responded?
Sources of information: Yahoo Finance, Company Profile (PDF file) in London Stock Exchange, Annual Report, Company website, Data Stream Database.. etc…
Part III: A- Analyzing a Firm’s Current Financing Choices
• To examine a firm’s current financing choices and to categorize them into debt (borrowings) and equity and to examine the trade-off between debt and equity for your firm.
• Where and how does the firm get its current financing?
• Would these financing choices be classified as debt, equity, or hybrid securities?
• How large, in qualitative or quantitative terms, are the advantages to this company from using debt?
• How large, in qualitative or quantitative terms, are the disadvantages to this company from using debt?
• From the qualitative trade-off, does this firm look like it has too much or too little debt?
Framework for Analysis
1• Assessing Current Financing
1.1. How does the firm raise equity?
a. If it is a publicly traded firm, it can raise equity from common stock and warrants or options.
b. If is a private firm, the equity can come from personal savings and venture capital.
1.2. How (if at all) does the firm borrow money?
a. Does it use bank loans or corporate bonds?
b. What is the maturity structure for the debt?
c. What type of debt does the firm have? (Currency mix, fixed versus floating)
1.3. Does the firm use any hybrid approaches to raising financing that combine some of the features of debt and some of equity?
• Examples would include preferred stock, convertible bonds, and bonds with warrants attached to them.
2. Detailed Description of Current Financing
2.1. If the firm raises equity from warrants or convertibles, what are the characteristics of the options (exercise price, maturity, etc.)?
2.2. If the firm has borrowed money, what are the characteristics of the debt (maturity, coupon or stated interest rate, call features, fixed or floating rate, secured or unsecured, and currency)?
2.3. If the firm has hybrid securities, what are the features of the hybrid securities?
3. Breakdown into Debt and Equity
3.1. If the firm has financing with debt and equity components (such as convertible bonds), how much of the value can be attributed to debt and how
much to equity?
3.2. Given the coupon or stated interest rate and maturity of the nontraded debt,what is the current estimated market value of the debt?
3.3 What is the market value of equity that the firm has outstanding?
4. Trade-Off on Debt versus Equity
Benefits of Debt
• What marginal tax rate does this firm face, and how does this measure up to the marginal tax rates of other firms? Are there other tax deductions that this company has (like depreciation) to reduce the tax bite?
• Does this company have high free cash flows (for example, EBITDA/firm value)? Has it taken and does it continue to have good investment projects?
How responsive are managers to stockholders? (Will there be an advantage to using debt in this firm as a way of keeping managers in line or do other [cheaper] mechanisms exist?)
Costs of Debt
• How high are the current cash flows of the firm (to service the debt) and how stable are these cash flows? (Look at the variability in the operating income over time.)
• How easy is it for bondholders to observe what equity investors are doing? Are the assets tangible or intangible? If not, what are the costs in terms of monitoring stockholders or in terms of bond covenants?
• How well can this firm forecast its future investment opportunities and needs?
Getting Information about Current Financing Choices
The information about current financing choices can almost all be extracted from the financial statements. The balance sheet should provide a summary of the book values of the various financing choices made by the firm, though hybrids are usually categorized into debt (if they are debt hybrids) and equity (if they are equity hybrids). The description of warrants outstanding as well as the details of the borrowing that the firm has should be available in the footnotes to the balance sheets. In particular, the maturity dates for different components of borrowing, the coupon rates and information on any other special features should be available in the notes.
Online sources of information: Review
Part III: B -Analysing an optimal Financing Mix
• To estimate the optimal mix of debt and equity for your firm and to evaluate the effect on firm value of moving to that mix.
• Based on the cost of capital approach, what is the optimal debt ratio for your firm?
• Bringing in reasonable constraints into the decision process, what would your recommended debt ratio be for this firm?
• Does your firm have too much or too little debt
– relative to the industry in which they operate?
– relative to the market?
Framework for analysis
1. Cost of Capital Approach
• What is the current cost of capital for the firm?
• What happens to the cost of capital as the debt ratio is changed?
• At what debt ratio is the cost of capital minimized and firm value maximized? (If they are different, explain.)
• What will happen to the firm value if the firm moves to its optimal?
• What will happen to the stock price if the firm moves to the optimal and stockholders are rational?
2. Building Constraints into the Process
• What rating does the company have at the optimal debt ratio? If you were to impose a rating constraint, what would it be? Why? What is the optimal debt ratio with this rating constraint?
• How volatile is the operating income? What is the “normalized” operating income of this firm, and what is the optimal debt ratio of the firm at this level of income?
3. Relative Analysis
• Relative to the industry to which this firm belongs, does it have too much or too little in debt? (Do a regression, if necessary.)
• Relative to the rest of the firms in the market, does it have too much or too little in debt? (Use the market regression, if necessary.)
Getting Information about Optimal Capital Structure
To get the inputs needed to estimate the optimal capital structure, examine regulatory filings and the annual report. The ratings and interest coverage ratios can be obtained from the ratings agencies (S&P, Moody’s), and default spreads can be estimated by finding traded bonds in each ratings class.
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