Aberdeen Asian Income Fund and the Advance Frontier Markets Fund Ltd's Activities - Example

ABERDEEN ASIAN INCOME FUND AND THE ADVANCE FRONTIER MARKETS FUND LTD Affiliation Date Introduction The London Stock Exchange is located in the London city that is in the United Kingdom. In December 2011, the stock market had a market capitalization of US$3.266 trillion (short scale). Making it among the five largest by this measurement (and the second-biggest in Europe, after Euro next). The stock market was founded in 1801, and its current location is in Paternoster Square near St Paul's Cathedral in London City. The Exchange comprises of the London Stock Exchange Group. In this discussion, we analyze Aberdeen Asian Income Fund and Advance Frontier Markets Fund Ltd companies that deal in Equity Investment Instruments and are listed on the London Stock Exchange (Ronald 2001). Aberdeen Asian Income Fund Limited is a closed-end company. The investment aim of the Company is to give investors a total return primarily through investing in securities in within the Asia Pacific .The company heavily invests in within the Pacific region via companies which has been listed on stock exchanges in the Asia Pacific area. It invests in areas, such as aerospace and defense, the air freight and logistics, beverages, commercial banking, telecommunication services diversified, food and staples selling and Government securities (Aberdeen 2014). On the other hand, Advance Frontier Markets Fund Limited was incorporated as a company on 25 April 2007 and is a Guernsey closed-ended investment company. Hence, the rights of shareholders may vary in relation to shareholders either in a UK incorporated company. In total there has been a sum of US$85,000,000 million which was raised in the process of placing the about US$ 85,000,000 shares that has been believed to be ordinary and 17 million warrants (Denzil, 2009) Trading in the ordinary shares and warrants started on 15 June. Subsequently a further $90,443,040 was earned in the process of trading of ordinary shares in June 2008 (ABERDEEN ASSET MANAGERS LIMITED, 2014) the warrants expired on 29 June 2010. The objective of the Company is to create long-term capital growth to its Shareholders. In most cases portfolio proportion that has been invested within each segment of the Frontier Markets tend to differ in relation to where the given Investment Managers perceives the most attractive opportunities for investment to be. Investee Funds may entail closed and open-ended funds; funds which are meant for trade, partners that are known to be limited and more so the managed accounts. Pending reinvestment or distribution cash will be placed in bank deposits, bonds or money market instruments (VWD Group 2014). In financial terms capital structure refers to the way Aberdeen Asian Income Fund and Advance Frontier Markets Fund Ltd finances it’s acquiring of assets via the process of combining equity, debt and hybrid securities. Company’s capital structure is used to indicate the composition and structure of its liabilities. For example, a firm, which own $20 billion in equity and $80 billion in debt, is termed to be 20% equity-run and 80% debt-financed. The rational of the firm debts to total financing, 80% in this case, is referred to as the company’s leverage (Aberdeen 2014). Considering a perfect capital market (no transaction or bankruptcy costs; perfect information). Aberdeen Asian Income Fund and Advance Frontier Markets Fund Ltd can borrow at the same interest rate; no taxes; and returns on investment are not affected by financial uncertainty. Their first 'proposition' to note is that, the Aberdeen Asian value is independent of its capital structure. On the other hand the 'proposition' is that the costs in relation to the of equity for a leveraged company tends to be equivalent to the cost of equity for a leveraged company, plus an added premium for financial risks. In that case the leverage tends to increase, hence the risk tendencies are shifted within different classes of investors, while total firm risk is constant, and hence no extra value is created. The analysis is extended to incorporate the results of the levis and the bad debts that may occur. In the process of the tax deductibility of interest makes financing of debt valuable; that is, the cost of capital decreases as the proportion of debt in the capital structure increases. The optimal structure would then be to have virtually no equity at all, i.e. a capital structure consisting of 99.99% debt (George 2003). Changes in capital structure from 2009 to 2014 for Aberdeen Asian Income fund limited, http://www.asian-income.co.uk/aam.nsf/ITAsianIncome/profilecapital http://www.asian-income.co.uk/aam.nsf/ITAsianIncome/profilecapital ADVANCE FRONTIER MARKETS FUND LTD, detailed share information, http://www.frontiermarketsfund.com/shareholder-information/share-price-information.aspx b) Companies financials, Advance Frontier Markets Fund Ltd, Source:http://www.frontiermarketsfund.com/~/media/Files/A/Advance-Frontier/shareholder-information/reports-accounts/AFMF%20Annual%20Report%202014.pdf http://www.frontiermarketsfund.com/~/media/Files/A/Advance-Frontier/shareholder-information/reports-accounts/AFMF%20Annual%20Report%202014.pdf Aberdeen Asian Income fund limited financials Source: http://www.asian-income.co.uk/pdfupload.nsf/B1EB1A74ADE10718802571D9003640AB/$file/asianincomeinterim.pdf?OpenElement Source; http://www.asian income.co.uk/pdfupload.nsf/B1EB1A74ADE10718802571D9003640AB/$file/asianincomeinterim.pdf?OpenElement Determinants of capital structure Profitability, The first key capital structure variable is profitability that is found in many studies to have a negative relationship with debt levels/gearing. Firstly with small country studies in the US, small Australian companies, with both studies finding support for a negative relationship. The size of Aberdeen Asian Income Fund and Advance Frontier Markets Fund Ltd can often change the findings. One study, that combines small and medium sized companies in the UK, does find a negative relationship, linked to these findings is the maturity structure of the debt by small companies with short-term debt being preferred over long-term debt (Arvin 2012). Asset structure, A second variable for which consistent results have been found in previous research is for the relationship between asset structure and debt levels. Companies, who have high levels of fixed assets, particularly tangibles ones, can secure high levels of debt by providing security on these assets. Growth, Research surrounding the relationship between growth and debt levels is mixed, with some studies showing a positive relationship and others showing a negative one. Studies on small companies find a positive relationship Meanwhile research in larger companies finds a positive relationship (Eugene 2013). Business Risk, There is a link between companies with high business risk and bankruptcy risk due to the nature of debt requiring monthly servicing. A study, which supports bankruptcy risk, finds that those companies with highly volatile returns use less debt in their capital structure in comparison with companies who have stable returns. Liquidity, Findings for the relationship for liquidity are also not consistent with each other. With the liquidity of firms having a negative impact on a company’s borrowing decisions, which could be due to the agency conflict between debt holders and shareholders (Jean 2010). Bankruptcy prediction models Author's compilation from Altman (2006) and Aziz M, Humayon A. (2006) Capital structure and financial distress   Aberdeen Asian Income Fund and Advance Frontier Markets Fund Ltd will borrow because the interest tax shield could be valuable for some of their shareholders. In times of relatively low debt levels, the probability of bankruptcy and financial distress is low, and the advantage of debt outweighs the cost for the company. At very high debt levels, the possibility of financial distress is a chronic. Continuing problem for Aberdeen Asian Income Fund and Advance Frontier Markets Fund Ltd, so any benefits from debt financing may be more than offset by the financial distress costs. Dividend imputation changed the ideas on the use of debt. However, the major assumption, that all shareholders can use franking credits and firms, can pay 100% franked dividends distorts reality. Many of these large firms earn income overseas and have international shareholders who are unable to make use the franking credits (Kent 2011). The Static theory of capital structure The theory of capital structure in a classical tax system that we have discussed is called the Static theory of capital structure. The theory that, a firm borrows up to the extent where the tax benefit from an extra dollar of debt is exactly equal to the cost that emerges from the increased probability of financial distress. It says that, Aberdeen Asian Income Fund and Advance Frontier Markets Fund Ltd borrow up to the extent where the tax benefit from an extra dollar of debt, is exactly equal to the cost that emerges from the increased probability of financial distress. We call this the static theory because it assumes that the firm is fixed in terms of its assets and operations, and it considers only possible changes found in the debt–equity ratio (Espen 2007). We can draw some limited conclusions concerning these. Taxes, First, the tax benefit from the leverage is obviously substantial tax shields from other sources, such as depreciation, will get less benefit from only important to firms that are in a tax-paying position. Firms with substantial accumulated losses will get little or no value from the interest tax shield. Furthermore, the company that has substantial tax shields from other sources, such as depreciation, will get less benefit from the leverage. A company will ultimately have to take into account a large number of factors that revolve around the generation of franking credits and the ability of the firm's shareholders to use those franking credits (Denzil 2009). In conclusion, Firms, that can pay fully franked dividends and whose shareholders are all residents, should have lower debt levels. However, once questions come up about the ability to generate fully franked dividends or shareholders are not able to utilize the franking credits. The use of debt, will become a decision to be made by management in Aberdeen Asian Income Fund and Advance Frontier Markets Fund Ltd. The value of the interest tax shield is of only limited value, except in cases where a high proportion of the company’s income is taxable offshore, which does not create tax (franking) credits. Another issue companies would need to look at is the proportion of non-resident shareholders for whom the franking credits are worthless. In financial distress, firms with a higher risk of experiencing financial distress will borrow less than companies with a lower risk of financial distress. For example, all other things being equal, the greater the volatility of the investment, the less Aberdeen Asian Income Fund and Advance Frontier Markets Fund Ltd should borrow.  In addition, financial distress is more costly for some companies than for others. The costs of financial distress will depend primarily on the company’s assets. In particular, financial distress costs will be dictated by how easily ownership of those assets can be transferred to another party.  For example, a company with mostly tangible assets that can be sold without great loss in value will have an incentive to borrow more. For companies that rely heavily on intangibles, such as employee talent or opportunities for growth, debt will be less attractive since these assets effectively cannot be sold. References Aberdeen. (2014). Half-yearly Report. Available: HTTP://www.asian-income.co.uk/pdf upload.nsf/B1EB1A74ADE10718802571D9003640AB/$file/asianincomeinterim.pdf?Op enElement. Last accessed 20th January 2015. Arvin G (2012). Capital Structure and Firm Performance. USA: Transaction Publishers. 93. ABERDEEN ASSET MANAGERS LIMITED (2014). Capital structure. Retrieved from http://www.asian-income.co.uk/aam.nsf/ITAsianIncome/profilecapital. Last accessed Tues, 20 January 2015. Denzil Watson, Antony Head (2009). Corporate Finance: Principles and Practice. UK: Financial Times Prentice Hall. 94. Eugene Brigham, Michael Ehrhardt (2013). Financial Management: Theory & Practice. USA: Cengage Learning Inc. 233. Espen Eckbo (2007). Handbook of Corporate Finance: Empirical Corporate Finance. UK: Elsevier Science. 21. George Frankfurter, Bob G. Wood, James Wansley (2003). Dividend Policy: Theory and Practice. USA: Elsevier Science. 81. Kent Baker, Gerald S. Marti (2011). Capital Structure and Corporate Financing Decisions: Theory, Evidence, and Practice. New Jersey: John Wiley & Sons.. 5. I.M. Pandey (2009). Financial Management. New Delhi: Vikas are publishing ho. 83. Jean Tirole (2010). The Theory of Corporate Finance. New Jersey: Princeton University Press. 157. Ranald C. Michie (2001). The London Stock Exchange: a history. India: Oxford University Press, 2001. 117. Sanjiva Prasad, Christopher J. Green, Victor Murinde (2001). Company Financing, Capital Structure, and Ownership: A Survey and Implications for Developing Economies. UK: Soc. Univ. Europ. De Recherches Financière. 72. VWD Group. (2014). Shareholder information. Available: http://www.frontiermarketsfund.com/shareholder-information/share-price- information.aspx. Last accessed 20th January 2015. Read More