Boral Limited Financial Policy Decision Making - Case Study Example

Name Course Instructor Date Boral Limited Financial Policy Decision Making Working Capital Management Policies The working capital policy denotes the level of the venture in the current assets for achieving directed sales in a company. The policy can either be relaxed, restricted or moderate. Regarding the current assets, the relaxed policy has higher levels compared to the limited system. The informal system has a current asset level that lies between the relaxed and restricted policies. Therefore, working capital management makes resolutions contingent on the degree of the current assets and the resources to fund the current assets. For us to determine the policy that Boral Limited uses, we focus on the definitions of the three systems. Restricted or the aggressive policy allows the approximation of the current assets for achieving targeted returns in a belligerent manner. The system fails to consider any possibilities and provisions of unanticipated events. Therefore, the organization will forcefully implement the policies allowing no room for deviance. The level of returns matches the lowest current asset. On the other hand, a company that adopts a relaxed policy considers the uncertain happenings before approximating the current assets to achieve the projected revenue. The system allows a smooth running of the business activities, but the returns on the on the investment are lower because of the high interests attracted by the higher investments in the current assets. The moderate policy balances between the former systems. Therefore, to determine the type of system used by the Boral Limited, we focus on the current assets and the revenue of the company. From the financial report for FY2015, the total sales exceeded the current assets. The total amounts of the current assets were $1,741,300,000 while the total sales were $4,374,700,000. The net returns for the FY2015 also shot up compared to the FY2014. The working capital of Boral Limited is low because of the lower levels of the current assets. The interest cost for the FY2015 was $-72,100,000.00, which was much lower compared to the previous FYs. The increased revenues on investment are the direct result of the saved interest cost to the company. These traits clearly show that Boral Limited is operating under the aggressive working capital policy. According to Boral (9), site separation deferred revenue resulted in an increased cash flow in the FY2015. The report further records that a reduction in the inventories further improved then companies returns. Other strategies that the company employed to improve the performances included strong price discipline (Boral 12). These facts further support that Boral Limited shifted its capital management policy to aggressive policy. Different Interest-bearing Financing and the Overall Weighted Average Cost of Capital (WACC) The most significant current liabilities of Boral Limited includes accounts payable, interest-bearing loans and other borrowings, tax legal responsibility and supplies. Franco, Hill and Chen (446-447) note that interest-bearing bank loans remain the current primary liability. Therefore, to get the interest-bearing financing, we find the market worth of the liability. We then use the book worth of liability (D) to calculate the value of debt. For simplification purpose, we sum up the most recent average short-term debt and continuing debt. For the FY2015 ended in June, the short-term debts were $ 1,800,000.00 while the long-term debts were $ 1,320,800,000.00. However, as at December 2015, the average short-term debts were and the long-term average loan was. Therefore, the aggregate book value of debt (D) is: The WACC refers to the level at which a company can recompense all its security holders to finance its properties (Hitcher 228). In other words, WACC refers to the cost of capital of a company. Since firms finance their assets using debts and current capital, WACC will be the averaged of the expenses of all the sources of capital. The approach allows every financial source to be weighted by its corresponding use. The formula below calculates the WACC. The current market capitalization (e) of the Boral Limited is. Therefore, to calculate weights for the debt and the burden for the equity, we use the values of e and d. To get the value of current capital, we first use the CAMP model to determine the necessary degree of profit. According to Bankrate.com, the TTCMR (Ten-Year Treasury Constant Maturity Rate) gives the rate without risk as 2.48%. For Boral Ltd, β = 1.38. When we take the market rate to be, the current total capital will become: The debt cost requires the use of the value of interest in a previous financial year and the general liability. As at June of the year 2015, the interest expense of Boral Ltd was $59.02778 million. Therefore, the cost of debt will become: The current two-year average tax rate is 3.19%. Therefore, the WACC will now become: As at June 2015, the return on equity was 6.69%. With the current value of WACC, it is clear that Boral Ltd earns revenues that do not acquit well with the cost of capital. This situation is dangerous as will destroy the value as it increases. Nature of earnings distribution of Boral Ltd as well as its dividend policy The dividend policy of a company refers to the approach that a company uses to select the amount of the bonuses and the timing of payments. The first dividend policies include steady dividend rule, consistent dividend rule as well as the outstanding bonus rule. Bonus payout ratio is important in determining the dividend policy of a company. The dividend payout ratio is the measure of the fraction of the business's net income distributed to the shareholders during a financial year. The company distributes the net revenue in the form of dividends. Therefore, dividend payout ratio helps to show the portion of the proceeds distributed to the shareholders. This rate is imperative because it contributes to determining if the pays out a reasonable fraction of the income to the investors. For example, a company that is establishing itself will hardly give a dividend to the shareholders. On the contrary, a developed company may decide to give exaggerated bonuses in a bid to entice its investors. However, such a step is not wise because it is hard for a company to sustain high dividend rates for a long time. To determine the dividend payout ratio, we have to establish the total dividends as well as the net income. From the data provided, the dividend payout ratio for the Boral Ltd is as follows: Year 2012 2013 2014 2015 Dividend payout ratio (%) 78.014 70.513 89.820 58.442 The dividend payout ratio for Boral Ltd was too high for the period between 2012 and 2014, which might not be workable for its future operations. The rate was lower for the FY2015, which might be a strategy to increase its revenue for future expansion. The percentage of the dividend payout varies every year depending on the level of the earnings. Therefore, Boral Ltd used consistent dividend policy, which depends on the current earnings of the company (Clayman, Fridson and Troughton 120). This company does not have a target payout ratio, which is a planned goal bestowing the future share of revenue it wishes to distribute as dividends. Target payout ratio is only possible in the stable dividend policy, where the dividend payout ratio does not change even if the revenues become volatile every year. The dividend payout ratio of Boral Ltd varies as the income tax expense increases. For example, the rate was lowest for the year ended in June 2015, when the income tax expense was highest. The Capital Structure Decisions concerning the capital structure of a company are very crucial because the use of debts serves to expand the cost-effectiveness and significance of the enterprise. The use of higher proportions of debt as a cheaper part of finance in the capital structure acts as an interest tax shield further improving the earning per share. However, when a company uses the very high amount of debts in the capital structure, it makes itself prone to liquidation further increasing the chances of a total economic failure. Therefore, every firm has the task of developing an optimal capital structure through the use of unique structures like market share, market growth, and their stage of economic development. In most cases, companies will have a target capital structure, which they endeavor to realize. Different factors determine the capital structure of a firm. An all-encompassing capital structure must consider the risk, elasticity, revenue, control and timing (Gulati 18.6-18.7). The capital structure must become accustomed to the immediate fluctuating environments. It must allow the company to operate within its ability to service the debts. Therefore, the firm must have enough flow of cash to enable it to meet its future commitments. The different movement of money due to internal and external elements results to risk. Higher levels of debts increase the level of the risk. The capital structure must allow the firm to increase its revenue hence improving the earnings of the stakeholders. Control ensures that the money market minimizes the danger of managing the company. Finally, the capital structure must have the proper timing of financing based on the current and the future decisions. Boral Ltd has a target capital structure of maximizing their shareholder's fortune. This company’s top management seems to have an understanding that shareholders are the owners of the company and hence gives them the highest level of concern. Boral Ltd has a high dividend payout ratio as the earning per share continues to increase. The result is an increased shareholders equity, which leaves the company in a better financial position by further reducing the level of debts. The company has survived the risks in the market quite well and managed its obligations prudently. Therefore, Boral has cautiously combined the factors affecting capital structure. Work Cited Read More