Make sure you read the assignment directions and how it should be structured. When making comparisons between the companies we need to use ratios. For capital structure use gearing ratio (borrow capital/total capital *100 to get a %), interest cover (operating profit /interest) and dividend cover (profit after tax/dividend). We can use last 2 years of financial statements and make this ratios which will help us in comparing and how is company doing. Example if company wants more external sources they should get more borrow capital but only if they have high gearing ratio and high interest cover. If gearing ratio and interest cover is low they should go for more equity. If gearing ratio is high and interest cover low don’t go to borrow capital. Therefore, BC (borrow capital) cares less risk and is cheaper than SC (shareholders capital). 2 reasons to use BC over SC:BC has tax relief and BC has priority in both the return (interest) and return of the capital.
Also calculate stock market performance ratios: EPS (earning per share)- profit after tax/# of shares *100, DIVIDEND PER SHARE-dividend/# of shares *100, DIVIDEND YIELD-dividend per share/market price per share*100 ( expressed in pence), PRICE-EARNINGS RATIO-market price per share/earnings per share. Therefore if company is paying more dividends is good for income investors like pensioners, if company is paying a little dividend is reinvesting and growing it is for non-income investors like young people on good salaries.
Sources of finance can be internal and external. Internal are retained profit and revenue reserve. External are OSC(ordinary share capital), PSC(preference share capital), DEBENTURES( or in other words BONDS or LOAN STOCK), and BANK LOANS. OSC and PSC are shareholders capital and debentures and bank loans are borrowing capital. OSC has variable dividend and voting rights. PSC has fixed dividend and no voting right. Fixed dividend doesn’t mean it has to be paid, it can be avoided. For example if company makes a loss or management decides to expand and cuts the dividend. Debentures also have fixed interest. Interest cannot be avoided it has to be paid. Companies don’t need asset security to get a debenture. For bank loan company needs to have asset security. PSC gets their money back before OSC. Stock market decides on bonds value.
These are the notes from the class and professor said to use them in our assignment . Also to put financial statements in appendices.
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