Investment decision - Essay Example

Due to high dependency on equity in the capital structure, total cost of capital went quite high (19.63 percent). The required return on asset is 18 percent which is less then cost of capital, so the company’s new project does not seems profitable until and unless the prevailing capital structure is modified. As per the market scenario in Kuwait, deferent debt instruments where determined to find out which one will be more suitable for the company. It is recommended that company should introduce more debt to reduce the cost of capital.

As the market conditions are improving, the operating risk will go down and by enhancing financial leverage management will be able to boost profitability of the company. The company, Kuwait Cement was established in the year 1968 by Amiri Decree. In 1978 the first phase of cement plant was inaugurated by Sheikh Jaber Al Ahmad Al Sabah which had the production capacity of 1,350,000 tons per annum. The company started production of white cement in the year 1979 and the capacity was to produce 75,000 tons of white cement per year.

With passage of time the company’s capacity to produce cement went on increasing and it reached 2,070,000 tons per annum by end 1984. Kuwait cement entered in contract with M/s. PEG – Switzerland for providing consulting services to the project of clinker kiln whose production capacity was 1.8 million. The other services which the company was to provide were management of equipment at Shuaiba port, storage of fuel and conveyor belt management. At different point of time the company formed contracts with many international firms to enhancing the production capacity and to introducing better and advanced technology.

With the growing demand of white cement in the market, Kuwait Cement went on increasing the white cement production and by the year 1999 the production capacity reached to 170,000 tons as compared to 75,000 tons