Corporate finance analysis project

 

 

The objective is to write a corporate financial analysis of Almarai Company, using the project guidelines given. It should be short and focus less on mechanics (how the equation for levered betas is derived) and more on the results and recommendations.

 

CORPORATE FINANCE ANALYSIS PROJECT 

Introduction 

The project assignment mainly aims to conduct the corporate financial analysis of Saudi Arabia based food and beverage company namely Almarai Company. However, the major areas on which the project would like to shed light on the qualitative and quantitative basis mainly consists of stockholder analysis, evaluating the risk and return factors for investment, examining the proper capital structure of the company by determining the optimal proportion of debt and equity sources of financing. Finally, fair amount of concentration has been laid upon on the dividend policy of the company in critically analysing the return that is earned by the shareholders of the firm.
Almarai Company has been recognized as one of the largest producers and seller of dairy products mostly in the gulf regions. Over the years, the company has succeeded in maintaining a larger brand name by the process of diversifying its product and business operations.  

I. Stakeholder Analysis 

As per the different set of investment procedures that are put forward by the internal and external stakeholders of the company, it can be very well assessed that the company has been subjected to meeting the needs and interests of its fellow stakeholders on the strategic basis. As per the analysis of the various financial reports and press releases, the average investor of the stock of the company mainly constitutes the foreign pension funds that are taxable on a large basis which can lead to higher level of benefits at the time of proper diversification of the required funds as the process of diversification reduces the risk factor rate of return.  
 
Determining the average investor
 The average investors who are involved with the daily operations of the company has been associated with the growth operations of the company. Here, the food expansion plan has been largely developed on the basis of the feasibility reports that are put forward by the company officials. However, the major stakeholder of the company demanded an increase in the increase in the rate of return that is put aside by the investors for maintaining their long term term goals and interests of the company. (Robins & Wiersema, 2015)

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Marginal investor
It can be safely assumed from the various business implications that the company have been introducing newer set of strategic measures for the long term goodwill of the company. In other words, the marginal investors who are actively associated with the daily business operations mainly consisted of the portfolio rate of return to the investors of the company.  Thus, the people who are involved in maintaining diversification of the portfolio rate of return of the company seems to hold a diversified portfolio and rate of return involving the stock price premium of the company. Hence, the marginal investors of the firm would be determined entirely on the basis of breakdown of capital structure of the company which would be mainly categorized in the form of institutional and individual investor of the company. Thus, the stockholders of the company are mainly involved in maintaining a fair amount of corporate governance analysis of the company.

II. Risk and Return 

-Assessing the risk profile of the company and determining the changes 
The risk profile of the company mainly aims at total maximisation of the value of the business. However, it has been assessed that the risk profile of the company have helped in evaluating the total hurdle rate and consequent would aim to maintain a greater rate of return on the investment factor (Huselid, 2014).
-Performance profile of investment in the company 
The various rate of return that is assessed from the process of investment can be widely associated with the major implications of business scenario of the firm. On the other hand, the risk free rate of return of the company has been fairly dealt considering the fact of market portfolio rate of return of the company. This risk and reward facilities of the firm has been maintained considering the fact of proper investment of diversified portfolio rate of investment of the firm.  Thus, the degree of risk of the above mentioned firm can be determined in assessing the degree of variance measure of the company. Thus, the practitioners of stock market return of the company who are very much involved in this particular arena must be very much proactive for the purpose of evaluating the market risk portfolio of return for the company (Damodaran, 2016).
-Commenting on the company’s debt and equity structure 
In ascertaining the various implications of debt and equity of the company, the contribution of the capital structure of the company have been ascertained in consideration to the cost of debt and equity measures of the company (Singhvi & Desai, 2016). Thus, to put in a nutshell, the company has been highly successful in dealing with the investment portfolio of the company by keeping into account the major implications of the debt and equity structure of the company. Henceforth, the capital structure of Almarai has been determined in such a manner in which the proportion of total equity capital of the capital has been evaluated at 52%. On the other hand, the proportion of total debt of the company has been fixed at the rate of 48%, thus maintaining a fair amount of current market price of the company and maintaining a greater deal of flexibility of the company (Robins & Wiersema, 2015). Hence, the current market prices of the company have been highly successful in assessing the market rate of return that is put forward by the investors of the company. Moreover, the capital structure of the company has invested a greater amount on the risk free rate of return by performing the various IPO rate of return. Here, the rate of shareholders has been ascertained determining the fact of ownership structure of the firm by fully establishing the product mix factor of return. On the other hand, the factor of reinvestment and restructuring policy have added to the cause for determining the various rate  of investment of the company (Orlitzky, Schmidt & Rynes, 2010).  
-Evaluating the current cost of capital of the company 
After a thorough assessment of the cost of capital of the company, it can be very well evaluated that the company has been highly successful in maintaining a higher rate of weighted average cost of capital of the company.  Again, the cost of equity value of the company has mainly been formulated by taking into consideration the cost of equity share capital of the company. Hence, the key financial  indicators of the company  mainly involves the total amount of revenue earned by the company that can help in creating a proper investment plan that can help in assessing the long term rate of capital investment of the company. Thus, the costs of capital of the company that are mainly ascertained by the shareholders of the company have assessed the major rate of return for the capital investment for the company. Again in certain situations, the discounted rates of capital on investment have successfully helped in determining the pros and cons of investing the market rate of return. Apart from that, the equity risk premium of the investor portfolio rate of return have been planned in context of equity risk premium, rate of return and at the same time taking into consideration, the risk factor rate of return.

III. Measuring Investment returns 

The various set of returns that are gained from the different set of investment policies can be very well estimated from the quantitative point of view in terms of capital structure of the company. Hence, the return on capital of the firm can be very well assessed from the various aspects of debt and equity of the company.
 
Evaluating the investment and cash flow pattern of the company 
The return on capital that is derived from the firm must be focusing on the book value of debt and equity that are mainly implemented for achieving the financial objectives. From the various financial analysis of the firm, it can be very well implemented that the pattern that is derived from the various stability of cash flow return (Ehrhardt & Brigham, 2016).
  
Commenting on the book value of the asset
 The book value of return from the firm can be very well estimated from the returns on capital of that are earned by the firm. Moreover, the quantitative analysis of the firm can be very much helpful in reducing the risk factor of return of the project. Thus, the parameters that are used in estimating the book value of asset forms a greater part of the decision making process that are used at the time of investment measures. As per the latest reports that are published in the Bloomberg, it can be very well estimated that the return on capital of Almeria was estimated to be around 6.62% with comparison to the industry standards. Along with the debt structure of the company would mainly take into consideration, the value of shareholders equity along with the aspect of interest bearing debt capital. On the other hand, the shareholder’s equity of the company must also include the components of retained earnings and paid in capital of the company (Leary & Roberts, 2014). Hence, it can be very well evaluated from the projects that are mainly undertaken by UAE based company can yield a higher rate of return in the long run future scenario. 
Under certain circumstances, the book value that is determined by equity can be negative, and then it may become difficult to evaluate the return on capital employed by the company. On the contrary, if here is seen low return on investment or lower capital employed, there may be seen evidences for lower rate of return on investment (Jacobs Jr, Karagozoglu & Layish, 2012).             

Determining the future course of the project 
The future rate of return from the project can be very well initiated from the economic value added measure of the above mentioned company. Hence, the value of the company can very well help to ascertain the future rate of return that can help the investors to gain rapid strides in the industrial aspects of the company. Hence, to determine the future course of study, the book value and market value of the company are very much important in evaluating the perfect cost of capital that is needed by the company in order to raise financing.
Hence, the formula that can be determined for computing EVA could be (ROC-Cost of capital)(BV of debt + BV of Equity).Thus, the value of EVA can undergo higher level of differences with respect to the industry standards and book value of assets for the company.
Henceforth, to put it into a nutshell the financial components of Economic value added and return on capital employed of the firm that are computed for the different financial years for the company can very well help to determine the future course of study of the project (almarai.com, 2018).

IV. Capital Structure choices

 -Different types of financing used by the company in order to raise funds 
The various sources of funding that are used effectively by the company can help in evaluating the major areas of profitable investment for the company which can attract the investors to invest in the different areas. This can lead to greater amount of sustainability process. Moreover, the major sources of debt and equity funding analysis of the company are more or less derived from the governmental banks along with other financial institutions. Thus, from the various press releases and annual reports, the amount that was accumulated for the purpose of financing were bit on the higher side. Thus there was a higher amount of proper portion of debt financing with context of equity financing (Graham, Harvey & Puri, 2013).  

Advantages of using debt financing in qualitative and quantitative terms 
The various advantages of using the process of debt financing as a major sources of funding in the qualitative and quantitative terms can cause greater help when it comes to huge scale implementation of business planning and decisions that are made by the management of the company (Coles, Lemmon & Meschke, 2012). Apart from that, perfect utilization of debt financing can play a greater role in gaining taxation offsets and lastly it can help in making effective financial planning and at the same time help in initiating the different plans of budgeting. Moreover, the effectively in the tax rate of the company can be ascertained from the different aspects of financial analysis of the company. 
The parameters of debt financing can be quite effective in dealing with the costs of bankruptcy of the company that can further lead to gaining a higher level of flexibility in the future.    

Disadvantages of using debt financing 
In certain scenarios, measuring the process of debt financing in the qualitative and quantitative terms, the loan that is borrowed from the financial institutions are to be repaid back at a higher rate of interest which can further reduce the total profitability of the company.  

Explaining the qualitative trade off 
The company seems to be enjoying a higher proportion of debt in terms of ascertaining the quantitative pay off analysis of the company. Thus, to have a fairer idea or view of the optimal debt capital ratio of the firm, the debt of the company have helped in assessing the total debt of the company and providing the path for initiating the process of assessing the investment on capital (Al Mutairi et al. 2012).  In other words, the optimal debt ratio of the company have well very well evaluated the optimal level of debt ratio that are essential for the company in order to make a greater amount of financial planning  for the company.

 V.Optimal Capital structure

 The optimal capital of the firm generally takes into consideration the perfect blend of 40% equity and 60% debt of the company. This would help the firm to gain a greater foothold in this particular market.  

Finding the optimal debt ratio from the cost of capital approach
On the basis of market debt ratio that are put forward by the firm and examining the cost of capital of the company, it can be very well assessed that the debt of the company was found to be almost 40% of the total debt structure of the company. Now, if the total debt of the firm undergoes an increase, then the rate of interest simultaneously decreases to a greater aspect, which can be beneficial for the company.    
 
Recommending the perfect debt ratio for the company
In context of considering the perfect level of debt ratio of the company keeping in mind, the different set of related issues, the amount of debt which must be determined should be 60% with respect to 40% of equity.  

Determining the debt factor with context to the given sector or market 
 

 
Figure 1: Assessing the proportion of debt of the firm with respect to the given sector or market
(Source: almarai.com, 2018)
The debt factor of return of the given food company must take into consideration the funds that are received from the bonds and other related financial institutions. Thus, the company seems to have excessive amount of debt in context of the market and industry. 

Reference List

BOOK
Damodaran, A. (2016). Damodaran on valuation: security analysis for investment and corporate finance (Vol. 324). John Wiley & Sons.
Ehrhardt, M. C., & Brigham, E. F. (2016). Corporate finance: A focused approach. Boston:Cengage learning.
 
JOURNALS 
Aebi, V., Sabato, G., & Schmid, M. (2012). Risk management, corporate governance, and bank performance in the financial crisis. Journal of Banking & Finance, 36(12), 3213-3226.
Aggarwal, P. (2013). Impact of corporate governance on corporate financial performance. IOSR Journal of Business and Management (IOSR-JBM), 13(3), 01-05.
Al Mutairi, M., Tian, G., Hasan, H., & Tan, A. (2012). Corporate governance and corporate finance practices in a Kuwait Stock Exchange market listed firm: a survey to confront theory with practice. Corporate Governance: The international journal of business in society, 12(5), 595-615.
Al-Najjar, B. (2013). The financial determinants of corporate cash holdings: Evidence from some emerging markets. International business review, 22(1), 77-88.
Ayuso, S., Rodríguez, M. A., García-Castro, R., & Ariño, M. A. (2014). Maximizing stakeholders’ interests: An empirical analysis of the stakeholder approach to corporate governance. Business & society, 53(3), 414-439.
Coles, J. L., Lemmon, M. L., & Meschke, J. F. (2012). Structural models and endogeneity in corporate finance: The link between managerial ownership and corporate performance. Journal of Financial Economics, 103(1), 149-168.
Dhaliwal, D. S., Radhakrishnan, S., Tsang, A., & Yang, Y. G. (2012). Nonfinancial disclosure and analyst forecast accuracy: International evidence on corporate social responsibility disclosure. The Accounting Review, 87(3), 723-759.
Graham, J. R., Harvey, C. R., & Puri, M. (2013). Managerial attitudes and corporate actions. Journal of Financial Economics, 109(1), 103-121.
Hajek, P., Olej, V., & Myskova, R. (2014). Forecasting corporate financial performance using sentiment in annual reports for stakeholders’ decision-making. Technological and Economic Development of Economy, 20(4), 721-738.
Hong, H., Kubik, J. D., & Scheinkman, J. A. (2012). Financial constraints on corporate goodness (No. w18476). National Bureau of Economic Research.
Huselid, M. A. (2014). The impact of human resource management practices on turnover, productivity, and corporate financial performance. Academy of management journal, 38(3), 635-672.
Jacobs Jr, M., Karagozoglu, A. K., & Layish, D. N. (2012). Resolution of corporate financial distress: an empirical analysis of processes and outcomes. Journal of portfolio management, 38(2), 117.
Julian, S. D., & Ofori?dankwa, J. C. (2013). Financial resource availability and corporate social responsibility expenditures in a sub?Saharan economy: The institutional difference hypothesis. Strategic Management Journal, 34(11), 1314-1330.
Leary, M. T., & Roberts, M. R. (2014). Do peer firms affect corporate financial policy?. The Journal of Finance, 69(1), 139-178.
Lel, U. (2012). Currency hedging and corporate governance: a cross-country analysis. Journal of Corporate Finance, 18(2), 221-237
Orlitzky, M., Schmidt, F. L., & Rynes, S. L. (2010). Corporate social and financial performance: A meta-analysis. Organization studies, 24(3), 403-441.
Robins, J., & Wiersema, M. F. (2015). A resource?based approach to the multibusiness firm: Empirical analysis of portfolio interrelationships and corporate financial performance. Strategic management journal, 16(4), 277-299.
Singhvi, S. S., & Desai, H. B. (2016). An empirical analysis of the quality of corporate financial disclosure. The Accounting Review, 46(1), 129-138.
 
WEBSITE
Almarai - About Almarai Company. (2018). Almarai. Retrieved on 25th January 2018, from https://www.almarai.com/en/about
 

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