Bankruptcy: Vodafone and Samsung

Topics: Financial ratio, Finance, Corporate finance Pages: 8 (2355 words) Published: February 25, 2013
Table of Contents
Executive Summary2
Background Information2
Capital Structure Analysis2
Vodafone & Samsung Results3
Liquidity analysis3
Financial Leverage Ratios3
Possible changes in Capital Structure – Vodafone4
Possible changes in Capital Structure – Samsung4
Capital Structure Finance Theories4
Modigliani and Miller Irrelevancy Theory4
Pecking Order Theory4
Trade-off Theory4
Clientele Effect5
Traditional View & Shareholders Wealth5
Bankruptcy Prediction Models5
Univariate – Beaver’s Failure Ratios5
Strengths & Weaknesses5
Multivariate – Altman’s Z-Score6
Strengths & Weaknesses6
Multivariate – Ohlson’s Logit Score6
Strengths & Weaknesses7
Vodafone & Samsung Bankruptcy Prediction Analysis7
Univariate – Beaver’s Failure Ratios7
Multivariate – Altman’s Z-Score7
Multivariate – Olhson’s Logit Score7

Executive Summary
Background Information
Capital Structure Analysis
The capital structure of a company is comprised of the different sources of funding used to finance the company’s operations and growth, specifically debt, equity and retained earnings. The reason for analysing the capital structure of a business is to determine whether or not the proportion of debt to equity will allow a business to create wealth, without endangering the entity. There are many different ratios and techniques that can be used to analyse the capital structure of a business, and whether or not there are signs of financial distress, such as considering the debt-to-equity ratio, the current/quick ratio and gearing ratios. Further within this report (see Appendix X), we have performed multiple ratios on the financial data for both Vodafone Group Plc. and Samsung, such as: * Current Ratio – We chose to use this ratio as it is a strong ratio for measuring the liquidity of a company, determining their ability to pay off their current liabilities if they were to fall due * Net Working Capital Ratio – Again, we chose this ratio as it is also strong for liquidity measurement * Debt Ratio – The debt ratio measures how much of the businesses assets are currently financed by debt, with a lower percentage indicating less financial leverage, and also less risk * Debt-to-Equity Ratio – The debt-to-equity ratio is used to determine how much debt a business has for every £1 of shareholder’s equity * Interest Coverage Ratio - The interest coverage ratio is used to determine the extent to which a business can pay the interest required from any outstanding debt Vodafone & Samsung Results

Liquidity analysis
As shown in Appendix X, Vodafone has had a current ratio below 1 for the past 5 years, indicating that Vodafone does not have enough current assets to cover its current liabilities if they came due at this point in time. As expected, the quick ratio is even lower for each year than the current ratio. Although the current ratio is a concern and points to financial distress, it should be noted that Vodafone appears to be actively increasing their current ratio, with indications that it will soon rise above 1. INCLUDE SAMSUNG INFO AND COMPARE WITH MARKET AVERAGES For the past 5 years, the net working capital ratio has been negative, due to the fact that Vodafone has had a negative working capital. This portrays that Vodafone does not have sufficient liquidity to satisfy short term liabilities. Again, it should be noted that this figure has been improving steadily over the past few years, with no indicators showing that will not continue into the future. INCLUDE SAMSUNG INFO AND COMPARE WITH MARKET AVERAGES Overall, it would appear that Vodafone currently (and for the past 5 years at least) has liquidity issues, indicating potential financial distress. However, Vodafone has been consciously...
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