Capital Structure And Dividend Policy Of JB HI FI Limited

Capital Structure of JB HI FI Limited

Question:

Discuss about the Corporate Governance and Accounting and Finance.

In finance, capital structure defines about a way in which an organization finances its assets by a combination of debt, equity and hybrid securities. Capital structure of an organization is the composition of liability’s structure. Capital structure explains that how an organization could finance its overall growth and operations by using various sources of funds. Debts could be classifies into long term note payables or bond issues whereas equity could be in the form of common stock, retained earnings or preferred stock (Oliver and Schoff, 2017). Capital structure of an organization plays an important role in evaluating the new investment opportunity as well as it briefs about the associated risk and return of the company.

Payout policy is a set of guidelines which are followed by the companies to decide about the dividend amount. Payout policy is also known as dividend policy. Dividend policy assists the company to decide that how much portion of profit would be given to the stakeholders of the company as dividend (Borio, 2014). There are 2 major theories of dividend policy which are relevant dividend policy and irrelevant dividend policy.

The report explains about the capital structure and dividend policy of JB HI FI limited. The report would make it easier for the investors and the stakeholders to evaluate the financial position and performance of JB HI FI in the industry and in the market.

JB HI FI is a retailing firm is Australian market. It retails consumer goods, Blue rays, DVDs, CDs and various electronic and hardware devices in Australian as well as New Zealand market. Head office of the company is in Melbourne. Currently, 194 stores are owned by the company. The financial position of the company is quite strong in the market. The main aim of the company is to diversify its market at international platform and grab various market opportunities (Annual Report, 2017).

Capital structure is the combination of equity and debt of a company. The capital structure of JB HI FI has been evaluated to identify the performance and the position of the company in the market as well as the total cost of the company in terms of raising the funds. The capitals structure position of the company is as follows:

(Morningstar, 2018)

The above table explains that the debt of the company is 56.6% of total capital of the company whereas the total equity of the company is 43.3%. It explains that the debt level of the company is quite higher than the equity level of the company. It enhances the risk of the company. Though, the capital structure of the company is quite competent to the industry capital structure and explains that the current cost and risk of the company is balance (Brav, Graham, Harvey and Michaely, 2005). It further explains that due to lower level of the equity, it becomes easy for the company to offer a great rate of dividend to its shareholders.

Dividend Policy of JB HI FI Limited

Dividend policy explains about the total dividend against the net profit which has been given by the company to its shareholders. The dividend policy of the company briefs that the company is paying a good % of earnings as dividend to its shareholders. Dividend policy assists the company to decide that how much portion of profit would be given to the stakeholders of the company as dividend.

There are two policies of dividend payout which are relevant dividend policy and irrelevant dividend policy. Irrelevant dividend policy explains that the investors are not concerned about the dividend amount as they always have an option to sell the portion or the entire shares to earn the cash and the huge profit. It explains that the company should not offer dividends to the shareholders and must retain the profit as retained earnings (Miller and Modigliani, 1961). It would enhance the equity of the company as well as the risk and the cost of the company would also be lower with the increment in the retained earnings of the company.

On the other hand, relevant dividend policy explains that an organization should pay the dividends to its shareholders. Dividends are the only way through which investors could be attracted towards the stock of the company. Walter has argued that dividend payout ratio of an organization always affects on the company’s value. Further, it has also been evaluated that cost of capital and internal rate of return of an organization is positively related to each other (Black and Scholes, 1974).

In case of JB HI FI, dividend policy has been evaluated. Annual report of the company has been studied and it has been found that the company is offering dividend amount to its shareholders. The given figure shows that the dividend amount of the company is increasing rapidly due to the positive changes and increment in the net profit. It explains that the dividend policy of JB HI FI is relevant policy. In 2017, company has paid 118 cent dividend to each shareholder. It briefs that the company is following the relevant dividend policy. Though, the annual report of the company also briefs that the retained earnings are also managed by the company for future investments but the amount of dividend has never been compromised by the company due to retained earnings.

Due to the relevant dividend policy, it has been evaluated that the value of the company has been enhanced form last year and even the growth rate of share value of the company is also impressive. The stock position of the company explains that the dividend amount attracts the investors to invest into the company. Hence, when the company announces the dividend, stock price of the company enhances.

Thus, the above study briefs that the dividend payout policy and the capital structure are connected to each other. Payout policy is a set of guidelines which are followed by the companies to decide about the dividend amount. On the other hand, capital structure explains that how an organization could finance its overall growth and operations by using various sources of funds. According to the analysis on JB HI FI, it has been evaluated that the company is following the relevant dividend policies.

Connecting Capital Structure and Dividend Policy

Investment opportunity of the company has been evaluated on the basis of capital budgeting techniques. Capital budgeting technique is a process to determine the long term investment of an organization such as machinery and equipments. Capital budgeting makes it easier for the company to make decision about the investment in a particular project. The given case briefs that the plant and equipment has been purchased by the company is $ 10 million and the life of the machinery is 5 years. It also briefs that the cost of capital of the company is 15%.

Through the analysis on the given case, it has been evaluated that the company would be able to earn a good amount from the investment. The below table describes that the total cash flow of the company would be $ 44,97,734 at the end of 5^th year. It further describes that the inflow of the company would be higher than the outflow of the company and thus the investment is profitable for the company (Kinsky, 2011).

The above table briefs about the total cash flow of the company. But the time value of money concept briefs that the value of money changes rapidly. Thus, the cash flow of the company has been transformed into the present value of the cash flow.  Net present value of the investment proposal has been calculated and it has been evaluated that the Net present value of the investment opportunity would be $ 7,17,937.91.

(Higgins, 2012)

The net present value of the proposal briefs about the positive cash flow. It expresses that if the company would invest into the proposal then the company would be able to get high return. Further, the internal rate of return has been calculated to identify the cost and return relationship of the company. The internal rate of return calculation briefs that the internal rate of return of the company is 17% whereas the cost of capital of the company is 15%. It explains that the project should be accepted by the company as the return from the proposal is higher than the cost of the company.

(Brown, Beekes and Verhoeven, 2011)

Payback period has been calculated further to evaluate the total time period in which investment amount would be got back by the company. The calculation of payback period of the company briefs that the company would be able to get back the invested amount in 3.21 years. It expresses that the company should accept the proposal.

Further, the calculation of discounted payback period explains that the total invested amount would be got back by the company in 4.76 years. It expresses that the company should accept the proposal.

(Kaplan and Atkinson, 2015)

Lastly, the profitability index has been calculated of the investment proposal. Through the calculation, it has been determined that the profitability index of the proposal of the company is 0.062. It expresses that the company should accept the proposal.

The proposal has been evaluated with the help of capital budgeting techniques and through the calculations, it has been evaluated that the project should be accepted by the company as the NPV technique explains that if the company would invest into the proposal then the company would be able to get high return. Further, the internal rate of return explains that the project should be accepted by the company as the return from the proposal is higher than the cost of the company.

Payback period and discounted payback period calculation brief that the total invested amount would be get back by the company in less than 5 years and thus the project is profitable for the company and lastly, the profitability index also briefs that the level of the proposal is better.

Thus, it is recommended to the Masters limited that the investment should be done as it would offer huge return to the company as well as the competitive position of the company would also be better.

References:

Annual report. 2018. JB HI FI. [Online]. Available at: https://www.jbhifi.com.au/Documents/2017%20Annual%20Report.pdf [Accessed as on 13^th March 2018]. 

ASX. 2018. JB HI FI. [Online]. Available at: https://www.asx.com.au/asx/share-price-research/company/JBH [Accessed as on 13^th March 2018]. 

Black, F. and Scholes, M. 1974. The effects of dividend and dividend policy on common stock price and returns. Journal of financial economics.

Borio, C., 2014. The financial cycle and macroeconomics: What have we learnt?. Journal of Banking & Finance, 45, pp.182-198.

Brav, A., Graham, J.R., Harvey, C.R. and Michaely, R., 2005. Payout policy in the 21st century. Journal of financial economics, 77(3), pp.483-527.

Brown, P., Beekes, W., and Verhoeven, P. 2011. Corporate governance, accounting and finance: A review. Accounting & finance, 51(1), 96-172.

Higgins, R. C., 2012. Analysis for financial management. McGraw-Hill/Irwin.

Hillier, D., Grinblatt, M. and Titman, S., 2011. Financial markets and corporate strategy. McGraw Hill.

Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.

Kinsky, R. 2011. Charting Made Simple: A Beginner’s Guide to Technical Analysis. John Wiley & Sons.

Lord, B.R., 2007. Strategic management accounting. Issues in Management Accounting, 3.

Madura, Jeff. International financial management. Cengage Learning, 2011.

Miller, M. and Modigliani, F. 1961. Dividend policy, growth and the valuation of shares. Chcago Journals, Vol 4.p.p. 411-433

Morningstar. 2018. JB HI FI. [Online]. Available at: https://financials.morningstar.com/balance-sheet/bs.html?t=JBH&region=aus&culture=en-US [Accessed as on 13^th March 2018].  

Oliver, J. and Schoff, P., 2017. Agency and Competition Law in Australia Following ACCC v Flight Centre Travel Group. Journal of European Competition Law & Practice, 8(5), pp.321-328.

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