Boral Limited Financial Management - Essay Example

Student’s Name Professor’s Name Course Title Date Boral Limited Financial Management When making an investment there are factors that need to be taken into consideration for one to reap profits from this whole process. Investors are required to take close consideration in the industry and the firm in which they will want to invest. The various factors that need to be looked into include; financial performance of the firm, the expertise that one contains in knowing the insights about the industry, the market analysis about the firm should be done to determine the status of the firm and its competitive level and the impact of failure on the investment should be analyzed so that precautionary measures should be put in place to evade any negative impacts. From the above information, we can conclude that Bora limited has good working capital management policies since most of its current working capital can be able to settle the debts that need to be settled. This is indicated by the fact the current assets are higher than the debts that firmly holds. This is because working capital is determined by the current assets less the current liabilities. From the trend, it can be concluded that in the recent years the firm has been able to service its short-term debts without problems. This makes Bora Limited to be attractive to the investors as there will be no legal battles between the firm and debtors. With the fact that the working capital is positive, then it means that the firm will easily meet the short term expenses and have an opportunity of exploring new areas of investment that are going to be profitable to the company. The firm will easily be able to take decisions since it will be flexible in the way it will handle its activities leading to profitability. The positive working capital management policy is healthy for Boral Limited. It makes it one of the companies that are being looked into for investment since it has a good inventory management system, cash management system, short term financing policies and debt management system which are all a requirement for the growth of the firm (ACM, 12). When looking at the weighted average cost of capital (WACC), we try to investigate the rate at which a company is supposed to pay in regard to all financial assets that acts as security. We look at it so as to determine the cost of capital of the firm currently comparing it with the market rates. Looking at Boral Limited, the current cost of capital is 11.31%. Because it costs a firm to raise capital, then it is prudent for a firm to invest in those areas that will lead to earning extra returns (higher returns). Any firm that in its prediction sees that in the future times it will continue to generate positive returns, then it is possible that the firm’s growth will increase. However, if the firm’s earnings do not end up matching with the cost of capital that the firm incurs, then its value will be destroyed with its growth. Looking closely into Boral’s case, as of today the returns on the invested capital is 4.03% which does not match 11.31% which is the cost of capital. Thus, if Boral continues to be financed by the current firms then it will destroy its growth pattern that is upward trending. It is always prudent that firms should look into the value they derive out of any investment. Always the investments are made to derive increased value for the investors. When the cost of capital is higher than the rate of return that is expected out the investments of the firm then it will be difficult for the growth of the firm to be positive. Looking at the trend that has been there, the cost of capital has been reducing but the rate of return has not yet matched the said cost. The management of Boral should be in its move to ensure that they have put in place measures that are going to foresee the cost of capital matching the return of its investment. This can be achieved through the firm seeking alternative sources of financing that will be deemed cheap and affordable (Shuenn & Cheng, 17). To achieve this, the firm should review its capital structure, dividend policy and the investment policy. Other factors may be out of reach for the firm, however, this actions while baring a level of risk will enable the firm at the end to achieve its goal of matching the cost of capital with return on investment. Dividend policy plans are the plans the company has on how to share the earned profits with its shareholders. From the above information it is indicated that Boral limited has this policy of sharing 50% and above of its earnings with the investors. Regardless of how attractive the company will look towards investors due to the higher dividends that are paid to them, it should come to the attention of the management that there are investors who will always be interested in seeing their wealth grow instead of getting their cash now. They should come up with a flexible dividend policy that can also reintroduce the concept of dividend reinvestment plans that will lead other investors towards accumulating more wealth. If they introduce this option, they will have saved the tax that the investors could have incurred on the earnings made out of the dividend payout. Having the dividend reinvestment plan will save the company much cost of financing as it will reinvest the money instead of seeking higher costs of financing which are not health for the organization. Due to the status of the firm regarding the mismatch between the cost of capital and return on investment, then it will be prudent for the firm to be using this policy as a way of balancing the cost and return. Another dividend policy is maybe reducing the dividend sharing ratio as it is higher currently. This means that the firm is going to accumulate more funds for its investment reducing the cost of capital and also the amount of tax that is incurred by its investors. However, the management should have it in mind that by reducing the dividends, the taxes that are going to be imposed on the firm shall be higher than when they could have paid out higher dividends. However, the dividend reinvestment policy is the best option looking into the financial position and cost of capital of Boral Limited (John & Campbell, 12). When talking of capital structure we are trying to look into how finances of a given firm, the overall growth and operations this firm are achieved using the different sources of funds that are available to it. The firm can opt to get debt through the issuance of bonds or taking long-term payable notes. Also, it may opt to float equity which can be classified as common stocks, preferred stocks and retained earnings. The way a firm mixes the above-mentioned types or sources of capital is what is referred to as a capital structure. It is prudent that each and every firm should take careful consideration before deciding which is the best to source funds from. The capital structure of any given firm has a direct impact on the cost of capital. Boral limited has relied much on the equity that borrowing. This can be indicated by the high value of the shareholder's equity than the long-term debt that has been acquired by the firm. This is an indication that the firm has got a very strong capital base. However, bearing in mind that the firm has a higher cost of capital that the return on investment, then it is prudent for the management to look at the possibility of doing a new mix that will lead to the reduction of cost of capital (John & Campbell, 15-17). The firm has tried to use the optimal capital structure ratios in its operation something that may be prudent but a lot of balancing is required to ensure that the financial healthy within the organization. Therefore, the firm should try to use the mixed capital structure in its approach so as to ensure that things are on track. The firm has used financial management policies that are both friendly to both investors and other stakeholders. They are trying balance between the maximizing the shareholders wealth and making the firm attractive for investment on it (AMC, 20). However, all these factors should be balanced. It is prudent that informed decisions should be taken to protect the financial position of the firm is healthy and growth of the whole firm is achieved without affecting any stakeholder in the firm. Sound financial management decisions are those that are well forecasted and have been tested to ensure their worth to the firm. They should be those that are understandable and easy to implement within the organization. They should involve all the stakeholders in the organization. Market analysis should be done before the implementation of this decision. Boral limited has tried to do all this however it need to some balancing regarding the capital structure. Work cited Australian Manufacturing Council. Practicing Balance: Integrating Best Financial Practice into Your Business, 1996. Melbourne, Victoria. John R. Graham, Campbell R. Harvey .The theory and practice of corporate governance: evidence from the field, 1999. Duke University, Durham, NC 27708, USA. Shuenn-Ren Chenga & Cheng-Yi Shiu b,Investor. Protection and capital structure: International evidence, 2006. Chung Hua University, Hsinchu 300, Taiwan, ROC. Read More