Table 3: Intrinsic Value Of Stocks

Decent Essays
Table 3: Intrinsic Value of stocks (Refer to Table 6 for Calculation of required rate of return through CAPM model)
For the calculation of bonds, the following information has been provided for Hirsch as shown in Table 5. The coupon rate of the bond is higher than the Yield to Maturity. This means that the bond will be sold at premium since its market value exceeds that of its par value Secrest & Burney (2007, p4).
Table 4: Intrinsic value of bonds Market value of Hirsch
The market value of Hirsch was calculated using its share price and number of years which came out to be £531,250,000 as shown below. Market value reveals the worth of the company and facilitates those individuals who plan on investing in Hirsch. Thus, it helps adjusting
…show more content…
Even though debt is a liability which has to be paid back to the debtors and if not, the company may end up defaulting on its payments and the debtors can claim back their funds through liquidity of its assets however, this in no way means that debt financing does not have benefits.
Table 6: Capital gearing, Income gearing and financial leverage ratios The table above briefly explains the financial ratios that have been calculated. Capital gearing ratio shows Hirsch’s capital structure. As explained by AccountingforManagement.org (2016), since company’s equity is higher than debt, it is low geared and depends less on debtors. Its opposite is debt to equity ratio which is 0.376 and explains the same result that the company is relying largely on the investment made by its shareholders.
Income gearing ratio of 0.02 and Interest coverage ratio of 50 both show that the interest expense of Hirsch is merely 2% of its overall profit. As mentioned by InvestorGuide (2016), even though this is a good thing since the risk of default on debt payment would be low but then, this also reduces the tax advantages that it could have enjoyed had the debt and interest expense been higher.
Critical analysis of debt
…show more content…
Thus, it facilitates timely growth of business and better returns if the operations are not delayed. Debt financing does not allow debtors to interfere with the usual running and decision making of the business as they do not acquire ownership of the business. This is the opposite of what happens in equity financing where the shareholders are basically the owners according to their number of shares and thus can influence their decisions as they have stake in the business. Moreover, debt financing positively impacts the financial performance of the company since it has tax advantages (the tax is deducted on profit after interest thus this value comes out to be lower than that without any interest

Related Documents

  • Improved Essays

    Case study analysis: 33 California Pizza Kitchen Managing for Corporate Value Creation FIN3CSFS2 2015 \ Abstract: This case analysis studies the financial performance and position of California Pizza Kitchen (KPC) including available sources of finance with optimal weightage to cost of capital minimal by share repurchase and their effect on share price and return. Question No. 1 As the history of California Pizza Kitchen (KPC) is concerned, it was incorporated in 1985 In Baverlly Hills, California.…

    • 976 Words
    • 4 Pages
    Improved Essays
  • Great Essays

    Can a company handle the interest expense associated with debt? Kohl’s, Inc. Kohl’s, Inc. Industry Target Formulas 03/20/15 03/21/14 10/06/2015 10/06/2015 10/06/2015 Debt to Equity Ratio TL/TSE 1.41 1.40 88.88 76.21 91.26 Times Interest Earned EBIT/Int Exp 4.97 5.15 5.00 3.01 3.66 Equity Multiplier TA/TSE 2.40 2.41…

    • 813 Words
    • 4 Pages
    Great Essays
  • Improved Essays

    Bravo Consulting Inc has made a detailed financial analysis in order to evaluate Cango’s performance and current financial position compared to Amazon, one of Cango’s biggest competitors. Bravo consulting decided to use the Ratio Analysis in order to analyze the process of the financial statements by computing ratios, and in this way inform the possible changes in the financial condition of Cango.. This Ratio Analysis will allow Bravo Consulting Inc to evaluate the key performance indicators like liquidity, solvency, and profitability of Cango. Such Financial Analysis will disclose Cango’s ability to earn income, identify its strength and weakness’s, and will also evaluate the short and longer term prospects of Cango.…

    • 329 Words
    • 2 Pages
    Improved Essays
  • Improved Essays

    The debt to equity ratio measures a company’s financial leverage by dividing its liabilities by its equity. A high ratio indicates a company is using too much financing to grow. Although financing is a great tool for increasing production and capital, it is significant that CanGo shows financial growth so that higher earnings can be distributed to shareholders rather than cash flow going to repaying debts. Barnes & Noble’s most recent debt to equity ratio is 0.33 (Businessweek.com, 2014), CanGo’s is 0.67 which is notably higher than the industry average. Still, other ratios tell us that CanGo is not financing its growth enough, and is being too cautious with its capital.…

    • 716 Words
    • 3 Pages
    Improved Essays
  • Great Essays

    Issuing equity sends a bad signal to investors about the prospects of your company and essentially admits to having a cash problem. Investors will interpret the issuance as management believing that the company’s current shares are too high. The combination of the increased number of shares and the possible negative reaction from the public would lead to dilution of shares for Corning’s current shareholders. There are also two drawbacks to issuing debt that are specific to Corning’s current situation. For Corning to maintain their $2 billion revolving line of credit, they must keep a debt to capital ratio of less than 60%.…

    • 1298 Words
    • 6 Pages
    Great Essays
  • Decent Essays

    The company appears to have a low amount of debt; about 3% of assets are financed by debt. The ratios below show evidence of a conservative company in a creditors perspective, and interest ratio show a strong financial company. Debt Ratio Name Debt Ratio…

    • 839 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    Issuing Debt Benefits

    • 53 Words
    • 1 Pages

    Because of tax advantages on issuing debt, it is cheaper to issue debt rather than equity. At some point, the cost of issuing debt becomes higher because of the increasing default risk with increasing debt, which also increases the interest rate that the company will have to pay in order to raise…

    • 53 Words
    • 1 Pages
    Decent Essays
  • Improved Essays

    Although this number is not extremely low, it does show that it has a lower percentage of the profits in relation to its assets. ROE can be utilized to show how a business profits are in relation to the amount that is withheld as shareholder equity. Valued at 53.83%, Moserk is nearly double the industry average at 28.75%. This strongly shows the overall value of the shareholders and their role in the business. Although this high number is considered a strong value, it does not properly represent the entirety of the companies financial…

    • 709 Words
    • 3 Pages
    Improved Essays
  • Great Essays

    This can be a great concern if the company has a history of not making enough profit. If the company misses a payment, they will go into a default status. Furthermore, debt financing is typically an affordable option compared to equity financing. When considering the timing, debt refinancing is a quicker way to receive the funds compared to the alternative.…

    • 1295 Words
    • 6 Pages
    Great Essays
  • Great Essays

    01:42 01:42 What is 'Total Debt To Total Assets' Total debt to total assets is a leverage ratio that defines the total amount of debt relative to assets. This enables comparisons of leverage to be made across different companies. The higher the ratio, the higher the degree of leverage, and consequently, financial risk. This is a broad ratio that includes long-term and short-term debt (borrowings maturing within one year), as well as all assets – tangible and intangible. Total Debt To Total Assets BREAKING DOWN 'Total Debt To Total Assets' For example, assume hypothetical company Levered Co. has $40 million in long-term debt, $10 million in short-term debt, and $100 million in total assets.…

    • 292 Words
    • 2 Pages
    Great Essays
  • Decent Essays

    Your debt to income ratio is what makes the difference between paying your bills every month or falling behind and into financial disaster. Basically speaking, if you pay out nearly as much (or more) in monthly costs as you bring in your debt to income ratio is probably too high. As a business owner it is important to pay attention to debt to income ratio because it could have a significant impact if it gets out of control. 1. You may not be eligible for the financing you need when you need it if you have a high debt to income ratio.…

    • 456 Words
    • 2 Pages
    Decent Essays
  • Superior Essays

    Companies use debt for tax advantages while keeping ownership in the company and the ease of access to capital in times of low-interest rates (Reinartz & Schmid, 2016). Equity is more expensive than issuing debt because the corporation shares the future earnings with the part owners. Debt payments are required regardless if earnings decline, corporations do not have to pay part owners if earnings decline. Oracle currently uses short and long-term debt and common stocks to finance the overall…

    • 865 Words
    • 4 Pages
    Superior Essays
  • Improved Essays

    Coca-Cola Company is one of the multinational companies in the United State. Its capital structure plays an influential role in Shareholder’s Wealth Maximization. Normally, US multinational companies have the relatively higher indebtedness, so they often use the debt financing (Dobrica, 2007). According to Puravankara (2007), Coca-Cola Company uses debt financing to reduce the overall cost of capital, which can increase the return on shareholders’ equity.…

    • 747 Words
    • 3 Pages
    Improved Essays
  • Great Essays

    For this company, The Warehouse Group, the current ratio; the ability to pay short term debt, for 2014, it was 1.38 and in 2015, it was 1.60, so this means they have more ‘spare’ money to pay for their short term debts, and if not used it can be saved and invested. Liquid ratio has increased from 0.43:1 to 0.23:1, this allows the company to pay back any immediate debt (4-6 months). The interest cover is profit before interest and tax over interest expense, which is 5.9 times for 2015 and 7.2 times for 2014, which is a decrease so means…

    • 2423 Words
    • 10 Pages
    Great Essays

Related Topics