Study On Long Term Financing Structure Finance Essay - Free Essay Example

For last five financial years account shows that company had lower debt to equity ratio. During the period of 2005, 2006 and 2007 its net equity to debt ratio was 0.34, 0.30 and 0.42 respectively. But during the year of 2008, when recession hit badly in UK and worldwide; ratio jumped to 1.37. Company took some tough decisions to protect and strengthen the business for long-term. It is obvious that company tried to keep ratio down to 0.30 to 0.40 and for that reason ratio came down to 0.59 in 2009. Group reached agreement with all of its debt providers to amend the debt facilities in April 2009. Afterwards raised pound;510m of new equity and proceeds was used to reduce companys debts. Later in 2nd quarter the housing market started to recover; as there was a huge decline in housing market; new and existing housing since 2005. During the period of 2005 and 2007 group design capital structure maintain strong credit rating and appropriate funding structure. The Group planned to match long-term assets with long-term funding and short term assets with short term findings. Group used Equity, retained profits and long term fixed interest debt, primarily to finance intangible assets, fixed assets and land. Short-term borrowings are required primarily to finance net curren t assets, which do not include land bank assets of more than one year and work in progress. Net debt as a percentage of equity was 38.2% (2006: 18.6%) however, the Group aims to maintain a strong credit rating by seeking to keep year end modified net gearing (defined as borrowings less cash or cash equivalents as a percentage of tangible net assets adjusted for deferred tax assets and retirement benefit obligations) between 40% and 60% and interest cover greater than 5 times but less than 7 times. In 2007 group set the goalsto improve the relevant margin that followed byincreasein volume growth with new outlets. Due to merger outlets increased to 234 during 2008 from 183 in 2007. But it didnt go well with plan; company faced losses in 2008 and had to close down many outlets. In the year of 2009 company operated with 172 outlets reflecting the closure of existing outlets. In 2009 Taylor Wimpeys continued its operations that generated a loss before exceptional items and tax o f pound;96.1 million (2008 loss: pound;74.7 million). For exceptional items before tax for the year total pound;603.8 million (2008: pound;1,895.0 million) and which primarily related to reviews of the carrying value of land and work in progress. For that reasons Taylor Wimpey reported a loss before tax from continuing operations of pound;699.9 million (2008 loss:pound;1,969.7 million). After having agreed with debtors about amending debt facilities; Company issues new Ordinary Share at a price of 25 pence each to raise pound;510 million net of expenses. 2005 2006 2007 2008 2009 Gearing 25.33 22.99 29.44 57.73 37.08 Net Gearing 19.15 15.68 27.65 47.79 33.38 Debt equity ratio 0.34 0.3 0.42 1.37 0.59 2005 2006 2007 2008 2009 Total Borrowings 654.2 627.8 1,545.40 2,281.60 883 Due lt; 1 Yr 15.5 14.8 13.6 124.5 12.7 Due 1-2 Yrs 1.2 0 0 0 Due 2-5 Yrs 48.5 0 0 0 Due gt; 5 Yrs 589 0 0 0 Values are in pound; millions. Dividend policy It had been group policy to create long-term value creation for shareholder. Group had progressive dividend policy for last 10 years and intend to grow inline with earnings while maintain prudent level of cover and cash flow. Group paid total dividend of 8.90, 11.10 and 13.4 pence for year 2003,2004 and 2005 respectively. Group continued policy to increase the dividend to shareholder. In 2006 9.75 pence total dividend issued and in 2007 total dividend paid increased to 15.75 pence, an increase of 6.8% from last year.Group introduced pound;750 buyback share plan in the year 2007. But that didnt go far as company only manage to buyback 94.8 millions shares only and stopped the program, given the uncertainty of UK housing market. In 2008 group did not feel it appropriate to propose an interim dividend as a result of continue decline in market conditions. Given that conditions in both our major markets remain weak, group did not proposed a final dividend for 2008. Group decided t o review its dividend policy in the light of prevailing market conditions. Similar to last Year Company didnt declare any dividend for year 2009. Although market condition was improved, thegroup didnt not feel appropriate to issue dividend as a result of ongoing uncertainty in the wider economy. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Total Dividend (Pence) 6.12 6.7 7.4 8.9 11.1 13.4 14.75 15.75 0 0 2009 2008 2007 2006 Book Value 46.90 119.80 352.00 364.70 Market Value 35.31 87.27 278.71 328.67 Shares Issued 3,196.90 1,526.00 1,158.30 594.2 Cost of equity Cost of equity means a return require by a shareholder from a company. The traditional formula for cost of equity (COE) is the dividend capitalization model: Looking at the financial report of the company; Group did not issue the dividends for last two year and growth rate couldnt be calculated exactly as it should be. To do the calculation right; used the alternate calculation method that is Capital Asset Pricing Model (CAPM). This model defines relationship between risk and expected return and that is used in the pricing of risky securities. The original idea behind this calculation is to compensated in two ways; time value of money and risk. Risk of rate and Beta is given in financial reports. Market return was not available over the Internet and from official report. Market return was assumed 10 in this. Capital Asset Pricing Model CAPM 2009 2008 2007 2006 Risk free rate 3.1 4.4 5.1 4.6 Beta 2.82 2.82 2.82 2.82 Market return 10 10 10 10 CAPM 22.558 20.192 18.918 19.828 Taking analysis further company sales and earnings shows the company growth in terms of sales and earning for past 5 years. 2009 2008 2007 2006 2005 Sales 2,595.60 3,467.70 4,142.80 3,572.10 3,476.90 Earnings -640.6 -1840 -196.7 290.6 286.5