Debt Valuation, Share Evaluation And Cost Of Capital Calculation

Short term and long term debts used by an entity

R3D has chosen for the current assignment which deals in providing investment related services to all the users takes laces in the external environment. Previous name of this enterprise was Red chip international Ltd which is an Australian based firm come into existence in the year 2004 to offer investor relation services as meeting all the demands of the customers is an important motive of the business. After 12 years of the services offered by this entity finally the business has registered under the Australian stock exchange market to avail the market volatility. By taking all the advantages of stock market the so that firm can boost its overall earnings as the decision of listing under the stock market is to ensure its survival for time period in the same industry too get all the advantages of increasing the overall returns by the firm (Red chip International Ltd( R3D), 2017). Apart from offering investor relations services other kinds of services offered by the firm includes media services, business advisory, digital production and distribution services to attract variety of users from the external market.

Short term debt refers to current liabilities and long term debt refers to non-current liabilities held in a business according to the particular time period for which debt has taken by an entity to accomplish all aims and targets (Bouabdallah and et. al., 2017). Short term debt of the firm includes two components such as trade payables and shot term borrowings held in an entity and on the another hand, long term debt includes only long term borrowings taken by the owner to meet its long term desire. A reason of the borrowings is to meet the financial requirements of the firm.

Above table shows the actual performance of R3D firm with the results of the overall industry as it shows the fluctuating performance of the business concern with the company’s performance (Seo, Kim and Sharma, 2017). Industry average is just 37.91% and on the other hand, debt to equity ratio in 2015 is 105% which increases to 150% in 2016 shows the overall performance of the business. 

While comparing the industry average with the actual long term and short term debt of the company shows the actual variances (John, Kaviani, Kryzanowski and Maleki, 2017). Total percentage change of short term debt is higher than the industry average shows the positive influence of the firm. At the same time, long term debt shows negative influence of the industry average n an entity as -31% change is lower than the industry average of 37.91%.

Consistency of the debt structure of firm with the industry

Share Evaluation

Company’s cost of equity

Stock of the red chip international Ltd has ascertained by using price to free cash flow, enterprise value to sales and finally enterprise multiple option to test the capability of the business (Chen, 2017). It can say that performance of the firm is showing negative figures as all these measures helps in testing the efficiency of the firm through the earning of the firm but in the current case there is loss instead of earning generated by the firm which needs to be improved with the passage of time.

Share price of the company’s stock fluctuates with the external changes takes places in the external business environment as an entity can avail all the benefits of the external market by considering all the key considerations (Debortoli, Nunes and Yared,  2017). Current share price of R3D enterprise is $0.03 which may get increase or decrease with the passage of time.

Interest rate is another factor that helps in evaluating the share market performance of the business by taking into considerations all the factors in building the business performance of the firm (Perez, 2017). An entity need to keep watch on the performance of the business as higher interest rates can increases the share price which directly affected the customer base of the business in the external business entity.

Tax rate play an important role in determining the actual rate of weighted average cost of capital of Red chip international Ltd (John, Kaviani, Kryzanowski and Maleki, 2017). The impact of tax rate will shown in the final results of the company which is clearly reflects in the performance of the firm as due to tax rate the cost WACC of 2015 and 2016 gets reduces.

Short term debt is one of the parts of the current liabilities without which evaluation of the overall debt structure of an entity gets incomplete (Sy, Jamel and Derbali,  2017). A debt incurred in the firm is a mixture of both short term debt as well as long term debt which forms the overall debt held by the firm in an entity.

Advantages

• It shows overall picture of the capability of the firm by showing actual debt incurred in the firm.
• It reduces overall profit generated by the firm as lower profit has lower tax obligations incurred on the lower profit.

Disadvantages

• It increases the obligations of the firm in the form of interest expenses charged on the overall debt.

After assessing the overall cost of two components of the capital structure such as debt as well as equity an entity helps in taking important decision about investing in the business or withdrawing the share (Boyer, Lim and Lyons, 2017). Net present value of the economical appraisal helps in assessing two or more projects by seeking higher or positive returns in the future to consider the best suitable project just like projects are assessed on the basis of overall costs incurred in a business entity.

Industry influences on company’s long term and short term debt proportions

Higher or lower weighted average a cost of capital reflects the capability of the firm to pay off all its debts in a stipulated time period. An investor will ascertains the overall business performance of an entity that firm has calibre to generate higher profits in the future to justify the investments made by all the investors in an entity (Sharma and Mehra, 2017). Good image of the business plays a significant role in boosting up all the earnings of the concern. 

Important step after incorporating an entity is to develop the capital structure of the business concern that signifies the business operations of an enterprise (Crowe, 2017). Different sources of finances includes by the firm by including different proportions of debt and equity. Adequate structure is to be developed by the firm after judging the overall performance of an entity by analyzing the expectations of the external market.

Higher debt proportion in 2015 was 51% which increased to 82% in 2016 and on the contrary to this equity has 4% in 2015 which reduced to 18% in 2016. This shows the burden of debt on an entity as against to equity. 

Optimal capital structure is that kind of structure in which equity component has increases by the firm to overcome the higher costs of expenses charged on the available debt of the firm. In the current case, burden of debt affected an entity due to higher interest expenses which resultant into loss suffered by the firm (Salama, Nehring and Greberg, 2017). Higher inflation in the Australian market increases the prices of all the products which, in turn, contracted the customer segment of the business. 

After analyzing the WACC and comparables approaches measure results, existing condition of Red chip international Ltd is not good as basic reason behind this is the loss generated by the firm in both the years starting from 2015-2016 (R3D Global Ltd( R3D), 2017). The company has applied efforts in reducing the overall loss from 2015 to 2016 as loss in 2015 was $ 231310 which reduces to $102153 in 2016.

Financial analysis of the firm targeted on the basic weaknesses of an enterprise that is loss suffered by the firm in both years as these situations needs to be improved to gain the attention of all the investors. Condition of the firm looses investment opportunity as investors do not want to invest in the company like Red chip who generates loss.

Apart from loss incurred by the firm in both the years, cash flow position of the business is good as net cash flow in 2015 was 10225 which increase to 9676 that is total increase of 86541. Cash flow statements reflect that less cash expenses incurred in the business concern as compared to the entire revenues o the business.  

References 

Books and journals

Bouabdallah, O and et.al., 2017. Debt sustainability analysis for euro area sovereigns: a methodological framework.

Boyer, B., Lim, R. and Lyons, B., 2017. Estimating the Cost of Equity in Emerging Markets: A Case Study. American Journal of Management. 17(2). p.58.

Chen, J., 2017. WACC is Not the Proper Discount Rate for Asset Cash Flows.
García, F.J.P., 2017. The WACC. In Financial Risk Management (pp. 345-351). Springer International Publishing.

Crowe, C., 2017. Real estate investment analysis.

Debortoli, D., Nunes, R. and Yared, P., 2017. Optimal time-consistent government debt maturity. The Quarterly Journal of Economics. 132(1). pp.55-102.

John, K., Kaviani, M. S., Kryzanowski, L. and Maleki, H., 2017. Creditor Rights and Corporate Debt Structure around the World.

John, K., Kaviani, M.S., Kryzanowski, L. and Maleki, H., 2017. Creditor Rights and Corporate Debt Structure around the World.

Perez, D. J., 2017. Sovereign debt maturity structure under asymmetric information. Journal of International Economics.

Salama, A., Nehring, M. and Greberg, J., 2017. Financial analysis of the impact of increasing mining rate in underground mining, using simulation and mixed integer programming.Journal of the Southern African Institute of Mining and Metallurgy. 117(4). pp.365-372.

Seo, K., Kim, E. E. K. and Sharma, A., 2017. Examining the determinants of long-term debt in the US restaurant industry: does CEO overconfidence affect debt maturity decisions?.International Journal of Contemporary Hospitality Management. 29(5).

Sharma, A. and Mehra, A., 2017. Financial analysis based sectoral portfolio optimization under second order stochastic dominance. Annals of Operations Research. 256(1). pp.171-197.

Sy, A., Jamel, L. and Derbali, A., 2017. Do ownership structure and quality of financial information affect the cost of debt of Tunisian listing firms?. International Journal of Critical Accounting. 9(2). pp.140-153.

Online

Redchip International Ltd( R3D), 2017. Available through: < https://www.digitallook.com/equity/Redchip_International_Limited> [Accessed on 19^th September 2017].

R3D Global Ltd( R3D), 2017. Available through: < https://www.investing.com/equities/redchip-international-ltd-ratios> [Accessed on 19^th September 2017].

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