Corporate Finance

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Table of content
Executive summary

1.Introduction4
1.1. Overview of Adelaide Brighton Limited4
1.1.1. History 4
1.1.2. Industry 4
1.2. Major competitors 5
1.2.1. Boral Limited 5
1.2.2. Fletcher Building Limited 5
1.2.3. Brickwork Limited 5

2.Capital structure 6
2.1. Leverage 6
2.1.1. Current ABC’s leverage6
2.1.2. Recent history of ABC’s leverage6
2.2. ABC’s capital expenditures and its financing 9
2.3. Comparison of ABC’s capital structure with similar companies 10 2.4. Characteristics of the company influencing the leverage policy11 2.4.1. Tax advantage 11
2.4.2. Corporate tax rate 11
2.4.3. Earnings before tax and interest 11
2.4.4. Interest rate 11
2.4.5. Credit rating 12
2.5. Pecking order theory 13
2.6. Optimal capital structure 13

3.Dividend14
3.1. Dividend policy .14
3.2. Competitors Dividend Analysis …16
3.2.1 Brickworks Limited…...................................................................................................16 3.2.2. Boral Limited………………………………………………………….……………..….…....17 3.2.3. Fletcher Building Limited…………………………………………..……………….……....17 3.3. Comparison ………………………….…………………………………….......………………….18 3.4. Optimal dividend policy…………………...……………………….……..……........................20

4.Valuation………………………………………………………………………………………………..22 4.1. Capital Asset Pricing Model (CAPM)22
4.1.1 Estimation of Beta (β)………………………………………………………..…..………..…22 4.1.2 Estimation of cost of equity………………………………………………….……….….... 23 4.2. Weighted Average Cost of Capital (WACC)23

4.2.1 Estimation of cost of Debt in 2010………………………….………………………….…24 4.2.2 Estimation of corporate tax rate……………………………………………………….….24 4.2.3 Weighted Average Cost of Capital……………………………………….……….………24 4.3. Estimation of Share Price25

4.3.1 Operating Revenue Forecasting…………………………………………..…….…..........25 4.3.2 Estimation of Balance Sheet and Profit and Loss statement …………..………….…..25 4.3.3 Free Cash Flow……………………………………………………………………………....26 4.3.4 Value of Adelaide Brighton Limited and estimation of share price………………......27 4.4. Sensitivity Analysis 27

4.4.1 Growth rate and share price……………………………...……………………..........……28 4.4.2WACC and share price…...………………………………………………………..……….…28 4.5. Comparison between actual and estimated share price29

Conclusion ……………………..30

Appendix…………………………………………………………………..…........................................31

Reference…………………………………………………………………..……...................................33

Executive summary

The main purpose of this report is analysis detail of the financial activities of Adelaide Brighton Limited. It provides an analysis and evaluation of the company’s current capital structure, leverage policy and dividend policy. Furthermore, the report valuates the firm’s value and analyses these valuation base on some method that given in lectures. In the report, some method calculations of analysis include some ratios such as Debt, Current and Quick ratios; Earning per share; Dividend per shares; WACC; Free Cash Flow are used. At the end of the report, all calculations can be found in the report and appendices. Regarding to the results of data analyzed, ABC’s capital structure was not optimal as the company has issued more equity than the use of debt financing. In particular, comparative performance is poor in the areas of capital expenditure, total gross investment and debt-equity management. On the other hand, the firm’s Earning per share was continuous increase over the last 5 years while dividend per share was decrease. Therefore, it could be state that the firm’s dividend policy tends to accumulate their retained profit instead of paying out all...
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