Critically Review - Capital Structure and Business Valuations

Question: Describe about the Case Study for Critically Review ,Capital Structure and Business Valuations? Answer: Dividend Policy of a firm has no relevance to the value of the firm. Miller Modigliani 1963 The above statement signifies that value of a firm depends entirely on the investment decisions as well as dividend policies in detailed form. The scholars pointed out that impact on specified dividend policy enhances means of financing for sale of new equity sales. Assumptions Investors do not pay much attention on the kind of dividends received from capital gains income as well as dividend income for the same. There is no issuance cost Organization does not pay for the issuance costs and new securities by obtaining required equity capital at similar costs. This reveals that organization pay for the past earnings and retains the dividends in an effective way (Avadhani 2012). Dividend payment results from regular pay of stock. It influences existence of investment policy for future analysis purpose. From the perspective of Miller and Modigliani, investment policy of an organization affects the dividend policy. From the theory on dividend policy, it is understood that existence of investors favours dividend policy for substantial impact in shared values. It mainly identifies alteration ways in dividend policy and end up losing stakeholders of other entities (Balla 2012). This approach leads to temporary reduction for the prices in organization stock. It is noticed that investors with preference of new dividend policy perceives undervalued entity and purchasing new shares (Fabozzi and Peterson Drake 2013). These transactions take place in an instant manner for carrying costs to the investor for the same purpose (Baltazar 2012). There is no change in the value of stock as well as net income from the assumptions on dividend policy of an organization. Gordons Theory on Dividend Policy is one of the famous theories that believe in the relevance of dividends concept. It mainly states the current dividends for determining the correct value of firm. This is the mathematical model for calculating the market value for using the dividend policy. This particular model relates directly with market value of company in relation with dividend policy for the same. Market Value determinants share the perpetual stream for payment of future dividends. It expects the cost of capital as well as expected annual growth of business enterprise in an overall manner. Walter Model shows clear relationship between the Cost of Capital, Internal Rate of Return. It mainly determines dividend policies for maximization of wealth from shareholders. On critical analysis, it is noticed that Walter Model shows usefulness from the effects of dividend policies. It relates with all equity firms under various assumptions for rate of return. It simplifies the nature of the model as well as lead to various conclusions in an overall manner. Walter Model enables mixing of share valuation as well as dividend policy for enabling investment decisions of the firm. This particular assumes various investment opportunities for financing retained earnings as well as no external financing debt or equity. It is noticed that wealth of the owners maximizes optimum investment in the most appropriate way. On critical analysis, it is revealed that Miller and Modigliani notes empirical evidence for suggested changes with regard to dividend policy and stock price influence. Most of the firms prefer policies at stipulated reasonable ways as well as stable dividends for future analysis purpose (Barrow 2011). Increased dividend policy displays specified types of information and anticipation of higher earnings in the near future. Dividends help in conveying reliable information that mainly concerns earning prospects of the firm (Finch 2012). This particular theory conveys the information content on dividend policies and influences share prices for specified dividend payments in an overall manner (Baxter 2012). It is important to compare three main theories on dividend policies. These theories plays important role in the financial management for future investment policies by business firms. In order to under the important and relationship, these theories give brief explanation on advancement of dividend policies. On critical analysis, it is noticed that Walter Model assumes optimization of owners wealth with efficient investment policies. On the Contrary, Gordon Model establishes dividend capitalization in relation with market value of each share. On the other hand, MM argues for internal as well as external financing equivalency in an overall manner. These three theories differs each other with large extent but are useful in many ways for smooth functioning of business firms. In the real world, dividend policy is relevant to a firm value From the real-life scenario taken from Imperial Tobacco, it is noted that the company plans for current dividend policies by increasing the payout ratios. It relates directly with dividend per share continues for steady growth as well as adjusted earnings per share in the near future. From the above statement, it is revealed the essence for bringing changes in regard with dividend payments. It helps the investors for evaluating the management attributes for matters relating to cash flow as well as future earnings of an organization (Bekaert and Hodrick 2012). From the management perspective, it helps in perceiving full access for information concerning the profitability of particular organization. It influences existing as well as potential investors for final decision-making process (Gapenski and Pink 2013). It is assumed that changed dividends helps in perceiving unambiguous indicators for availing future prospects of business enterprise. It reveals the information and related methods like management presentations on security as well as annual reports on changed dividend policy in the most appropriate way (Brigham and Daves 2013). It mainly provides signals to the investors regarding changed dividends and other related capital structure for the same. From the perspective of investors, it is noticed that level of dividend payments plays an important role in the real world scenario. Dividend stability helps in building positive image for the business organization (Brigham and Houston 2013). Company managements should understand that dividend payment uncertainty gives rise to creation of poor dividend policies and alienate with potential as well as existing investors. Unstable dividend payments greatly affect the perceptions of the investors on matters relating to performance of the organization especially in financial markets (Brooks 2013). These approaches may influence investors in final decision-making process regarding invest or divest in business organization. The above statement by Miller and Modigliani (1961), it fails to hold true sense in dividend policies and give rise to negative ramification on value of business enterprise. It is important to understand the fact that dividend represents in negative form over the cash flow of an entity for the same (Corelli 2014). On the contrary, special dividends mainly affect the value of the firm either positively or negatively. It influences main reason for issuance of special dividend for the same. For instance, value of firms affects special dividends for consisting payouts especially for early investors. It influences derivation from operating cash flows for recouping of sections for investment decision-making process in an overall manner. It is suggested that firm possess ability for operating more cash investment in the most appropriate way (Davies and Crawford 2012). Special dividends consisting of cash achievement from debt and advantage methods affect value of the firm. It is argued that cash flow of a firm has the capacity for covering the interest payments and worrying regarding the financial distress for the same (Greene and Dince 2013). Value of a firm gets affected by special payouts and aiming at reduced cash and cash equivalents for the same. It influences the payout ratio and comparison with balance sheet statements in an overall manner (Edmonds, McNair and Olds 2013). It is suggested that firm needs project confirmation and generating at reasonable returns for smooth functioning of business enterprise. Special dividends mainly occur when payouts are related with stock in comparison with cash attributes (Elliott and Elliott 2013). Addition to that, it offers overvalued stocks and artificially increased EPS for making changes in the business operations. In order to conduct relevancy on the dividend policy, it introduces models for incorporation of dominant determination in the near future. This particular model formulates undertaking of sample consisting 28 corporate entities in US in the year 1950 (Eun and Resnick 2012). Qualitative research conduction involves interviews from CEO and CFO of various firms in and around US. After conducting research, it is understood that establishment of dividend policy possess an active factors in the real world scenario. Most of the managers believes in stable dividends and remains effective in reduced negative perceptions among the investors (Grieve 2013). It is observed that a dividend payment as well as retained earnings adds to the by-product of dividend policy in an overall manner. It mainly emphasizes on active determinant on dividend policies and requires majority of shareholders for future analysis purpose (Fabozzi and Peterson Drake 2013). Author establishes the fact that managers should believes in investors and stable dividend pattern for market put premiums for harboured stable dividend policies. Most of the scholars claim that shared values influences earnings division for retention as well as dividends for the same. It involves preposition by MM and conduction of restrictive assumptions for future analysis purpose (Fabozzi and Peterson Drake 2013). It is noted that dividend policies for majority of shareholders and preference for dividend policies in an overall manner. It is explained the shareholders possessing risk includes preference dividends and promises future capital gains. On the contrary, consistent dividends provide certainty functions by the investors in the most appropriate way (Greene and Dince 2013). Reduced dividends ensure uncertainty among investors and making discounted future earnings for the business organization. Failure in paying the dividends influences increased uncertainty among the investors for future analysis purpose (Grieve 2013). This will lead to low share prices as well as rise in the discounted rates. It is important to consider the fact tha t transactions cost by the investors mainly implies receiving capital gains as well as cash dividends (Harrison 2014). Business and Financial Risks faced by Imperial Tobacco Financial Market Risk - Imperial Tobacco faces significant level of committed debt, debt capital markets as well as bank loan markets for the same. It expects various required financing for matured debt policies and obtaining markets for checking on the availability of funds. It relies on funds from various bank counterparties in an overall manner. It is noticed credit ratings fall due to rising cost of committed funding in Imperial Tobacco. It requires future funding and it affects rising debt issues from breath of funders. Groups Debt raises 44% of fixed levels of interest including high funding costs. It affects the cash outflows that need consideration on urgent basis. It is important to understand the fact that Imperial Tobacco faces number of business as well as financial risks in business (Kapil 2011). These risks are not limited to social risks, financial risks as well as environmental risks. It is revealed that illegal circulation of tobacco products negatively affects tobacco industry. Addition to that, it ensures conduction of anti-smoking campaigns for health authorities and related policy makers for the same. It mainly discourages the clients in engaging in behaviour patterns. It is noticed that tobacco advising indicates highly restrictive in nature (Kemp and Waybright 2013). Anti-tobacco advertisements help in developing positive attitude that smoking is unpleasant as well as unhealthy constraints. It is understood that increased prohibition for smoking in public places (Horngren, Harrison and Oliver 2012). Most of the people discourage smoking where they find location like smoking zone. Company Management acknowledges present level of uncertainty for experiencing in financial markets. It involves problems in counterfeiting for markets in Nigeria (Lorente and Lorente 2013). Most of the people found that replication of company products affect the extension of customers. It differentiates between genuine as well as illegal products for the same. It negatively affects the sale of related company products in an overall manner. Rogue importers include Rizler papers for increased targeting in Senegal (Madura 2012). It enhances the counterfeit products like booklets and keeps lower priced products for Imperial Tobacco. Most of the products show availability in major cities and towns foe saturation points with Imperial markets in fake products for the same (Kapil 2011). This particular approach hampers the performance as well as profitability growth for the business enterprise in the most appropriate way (Needles and Powers 2012). Recent Financial Performance of Imperial Tobacco Profitability Ratio of Imperial Tobacco Imperial Tobacco Profitability Ratio Gross Margin Ratio 2014 2015 Gross Margin $18,036,883 $20,587,576 Net Sales $21,864,478 $25,276,809 82.49400237 81.44847714 Profit Margin 2014 2015 Net Income $1,456,883 $1,877,741 Net Sales $21,864,478 $25,276,809 6.663241629 7.428710641 Return on Assets 2014 2015 Net Income $1,456,883 $1,877,741 Average Total Assets $16,902,088 $20,421,712 0.086195445 0.091948266 From the calculation, it is noticed that Gross Profit Ratio arrives at 82% in the year 2014 and 81% in the year 2015. It implies decreased gross profit ratio enabling smooth functioning of business enterprise. Net profit ratio arrives at 6% in the year 2014 and 7% in the year 2015. It should make ways in increasing the overall profit by way of maximization of net revenue in an overall manner. Shareholders Equity Return on Equity 2014 2015 Net Income $1,456,883 $1,877,741 Shareholder's Equity $2,814,518 $4,265,359 0.517631438 0.440230471 Shareholders Equity arrives at 0.51 in the year 2014 and 0.44 in the year 2015. It implies decreased equity share for checking future business activities. Imperial Tobacco believes in purchase of shares especially from buyback programme and detainment for shareholders deduction funds for future analysis purpose (Baltazar 2012). It involves purchase group of 867000 shares costing 182 millions in an overall manner. Imperial Tobacco deals with creating values as well as meeting the strict criteria for acquisition purpose. It involves buyback program for finding suitability for business activities (Barrow 2011). From the general perspectives, company believes in paying special dividend for supply funds in single instalment. For instance, management opts for disposing some part of business and generates surplus funds for given time. Debt capacity of the business and sources of financing available to Imperial Tobacco 2012 2013 2014 2015 Long-term Debt $4,028,538 $5,011,640 $5,488,591 $8,299,328 Total Equity $1,900,207 $2,972,081 $1,664,741 $2,023,128 Debt/ Debt+ Equity $0.68 $0.63 $0.77 $0.80 From the above analysis, it is easy to understand debt to equity ratio should be minimized as far as possible. It arrives at 0.80 in the year 2015 that needs urgent consideration by Imperial Tobacco. From the annual report of Imperial Tobacco, it is revealed that the company had achieved consistent increase in debt capacity from the year 2008. It helps in attribution kike acquisition of Atladis from early 2007 (Baxter 2012). It mandates undertaking of large borrowings for future analysis purpose. Debt accumulation involves subsequent valuation of the shares of business organization in an overall manner. Imperial Tobacco faces gradual decrease in reduced debt in faster manner over the past few years (Bekaert and Hodrick 2012). It is important to understand the fact that main sources of financing involves sale of shares in Imperial Tobacco. This concept helps the company in creating shared values with shareholders in the near future (Brigham and Daves 2013). One of the other sources of financing involves derivation from sale of diverse brands for future analysis purpose. It is noticed that market management involves good generation of profits. It helps in prioritizing companies responsible for positive returns for growth purpose. It mainly influences various product markets like fine tobacco, paper as well as cigar and smokeless tobacco (Brigham and Houston 2013). These diverse brands mainly records generation of positive returns as well as account for more than 12% of the total tobacco revenue. Imperial Tobacco commits policies for adequate funding and committed bank facilities. It enables meeting foreseeable borrowing needs in the peak period (Brooks 2013). It is noticed that acquisition of certain assets involves brands for entering into committed bank facilities for future analysis purpose. It mainly involves credit facilities as well as term loans for the same. It is important to understand the fact that Imperial Tobacco should generate cash acquisition for smooth functioning of business enterprise. Acquisition of fixed assets and updated technology helps in solving the issues in the near future (Paramasivan and Subramanian 2014). Recommendation on an capital mix of Imperial Tobacco It is advised that Imperial Tobacco should conduct best optimal mix that includes proposition of debt to equity ratio. This optimal mix helps in maximizing the shared values of particular business organization (Corelli 2014). Imperial Tobacco should offer balanced debt for the range of equities and ensuring minimization of cost of capital for smooth functioning of the business activities. It is recommended that Imperial Tobacco focus mainly on optimal capital structure because it ensures great deal of attention (Davies and Crawford 2012). It should help in maximization-shared values of the shareholders of Imperial Tobacco. This particular company should value processing equity as well as reduced debt for attaining future goals as well as objectives for the same. It helps in reducing equity amount among the available returns for improving the shareholder pattern in the near future (Edmonds, McNair and Olds 2013). It mainly creates favourable image and changed perceptions of the invest ors under Imperial Tobacco. It involves open market policies as well as adjusted earning per shares for future analysis purpose. It is recommended that Imperial Tobacco should engage in generating cash as well as harbours for responsibilities (Elliott and Elliott 2013). It enhances significant debt amount for consultation in the near future. It should involve in providing excessive optimal mix strategy especially for the investors as well as shareholders in the most appropriate way. This particular company should establish reasonable mix of equity for the main structured decisions in an overall manner (Eun and Resnick 2012). Imperial Tobacco should endeavours constant dividend policies as well as dividend payout ratios for analysis purpose. It is advised for proper allocation resources in the near future. It is recommended to Imperial Tobacco for reducing debt amount and increased equity shares for the same. It will help in smooth functioning of business enterprise for the same. Reference List Aamer, M. (2013).Microsoft Dynamics AX 2012 Financial Management. Packt Publishing. Avadhani, V. (2012).International financial management. Mumbai [India]: Himalaya Pub. House. Balla, D. (2012).CLEP financial accounting. Piscataway, NJ.: Research Education Association. Baltazar, E. (2012).International GAAP 2012. 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