Impact of Dividend Policy And Capital Structure Decision on Firm Value

Section I

Introduction

Business Finance is concerned with the determination of funds necessary for a firm, acquisition of the funds and utilization of the funds for achieving the goal of finance, which is maximizing firm value. And in order to do this, a finance manager must understand the impact of financial decisions on firm value so that he can make decisions that optimize the firm value.

Among all the decisions, a finance manager makes, dividend policy decision, and capital structure decision are perhaps the two most important decisions that affect the both the performance and image of a firm. So, in current dynamic business world, it has become increasingly important to understand the impact of dividend policy decision and capital structure decision on firm value.

Pharmaceuticals industry is one of the fast growing industries of Bangladesh. And Renata limited is one of the major competing companies in this sector. As instructed by our course teacher, in this report we have tried to identify the impact of dividend policy decision and capital structure decision of the company on its value. In addition, we have tried to find out the changes in firm’s value and risk due to changes in these decisions. Finally, we have tried to determine the impact of these decisions on the future performance of the company.

Objectives

The objectives of this report is to-

  • Determine the dividend policy of the Renata limited
  • Determine the value of the firm
  • Determine the capital structure of Renata limited
  • Estimate cost of financial distress
  • Determine whether capital structure decisions has any impact on firm value
  • Match our results with expectations and draw conclusions

Methodology

Data collection: For preparing this report, we have collected data from the following sources:

  1. Primary data: we have collected several primary data on the company as well as the pharmaceuticals industry from the management of the company.
  1. Secondary data: the secondary data sources were-
    • Annual reports: from the company.
    • Interest rate & other information: Dhaka stock exchange and daily newspapers.

Techniques applied: the techniques we applied to prepare this report are-

  • Dividend policy: trend analysis
  • Possibility of financial distress: Altman’s z-score
  • Firm value: market capitalization, Growth analysis
  • Ratio analysis and other financial & statistical techniques
  • Graphical methods

Scope and Limitations

Our study covers financial information of Renata limited from year 1996 to year 2004 (9 years).

However, we faced some limitations in preparing this report. These are-

v  Unavailability of financial information on market price for year 1996 and 1997

v  Inadequate disclosures on certain items of financial statements

v  Time limitations

v  Lack of statistical knowledge etc.

Despite these limitations, we tried to make the report a good one and we would be gratified if this report serves its purpose.

 

Section II-Company Profile

 

Overview of the Renata limited

Company Background:

The firm was incorporated in 1972 as Pfizer laboratories (Bangladesh) limited, subsidiary of Pfizer corporations, USA. Later, in1993 the company was renamed as Renata limited after divestment of shareholdings of Pfizer corporations, USA. Since its establishment, it has been one of the leading companies in pharmaceuticals. Although it lost some market share due to heavy competition in 1998-2001 periods, it has been able to recover from it and now is experiencing a high growth in business. Because of its good performance, it has already achieved top position in animal health products and is competing with the market leaders in pharmaceuticals products.

Business pattern:

  1. Field Of Business
The company operates it’s business in Pharmaceutical, Animal Health Products, Nutritionals And Vaccines
  1. Contract Manufacturing
Renata limited manufactures Oral Saline For BRAC And Social Marketing Company (SMC)
  1. Trademark Assignment
Renata achieved trademark assignment From Pfizer and Hoechst with manufacturing technology
  1. Licensing Agreement
Renata’s 10 products have been licensed to m/s. Deurali-Janata pharmaceuticals pvt. Ltd., Nepal for manufacture, marketing, and distribution in Nepal. Renata limited is giving technical assistance for upgrading their manufacturing plant to WHO GMP standards.
  1. Iso-9001 Certification
Renata’s Manufacturing plant received iso-9001 certificate in 1999
  1. Marketing And Distribution Rights
Renata possesses the marketing and distribution rights for the following products

  1. Chiron vaccines Germany /Italy for human vaccines
  2. Zinpro-USA; Biomin Austria and Pfizer-India for animal health products
  3. Evans vanodine international, UK for animal farm disinfectants
  4. Technical Assistance
BASF, Germany for animal health nutrition products
  1. Investment
  2. 99.99% shareholdings in Renata agro-industries limited
  3. 99.99% shareholdings in Purnava limited.

 Related parties & offices:

Corporate headquarters:

House No. 450, Road No. 31

New DOHS,

Mohakhali

Dhaka- 1206

 

Factory:

Section-7, Mirpur,

Dhaka-1206

 

Bankers:

Agrani Bank, Dhaka

American Express Bank Ltd. Dhaka

Sonali Bank Dhaka

Standard Chartered Bank Ltd, Dhaka

The Hongkong And Shanghai Banking Corporation Ltd., Dhaka

Eastern Bank Ltd., Dhaka

Mutual Trust Bank Ltd., Dhaka

Citi Bank, N.A., Dhaka

 

Auditors

Rahman Rahman Huq, Chartered Accountants

Legal Advisor:

Dr. M. Zahir And Associates

Board of directors:

  1.  S. H. Kabir                               Chairman
  2. Syed S. Kaiser Kabir                Managing Director
  3. Dr. Sarwar Ali                          Director
  4. Sajida Humayun Kabir             Director
  5. Md. Ziaul Haque Khondker     Director
  6. A. Hasanat Khan                      Director

Ownership pattern:

Although Renata limited is a public limited company, most of its shares (approximately 76%) are held by two shareholders; namely Sajida foundation and International Business Research Corp. Inc. so the company is closely held in private hands.

The ownership pattern of the company can better be understood from the following information:

Majority shareholders:

% Of total shareholdings

1997 1998 1999 2000 2001 2002 2003 2004
Sajida foundation 51.00 51.00 51.00 51.00 51.00 51.00 51.00 51.00
Business research international corp. inc. 25.33 25.33 25.33 25.33 25.33 25.33 25.33 25.33
ICB unit fund 13.02 12.51 12.29 12.17 12.16 11.05 8.29 8.90
First ICB mutual fund 0.71 0.71 0.71 0.71 0.71 0.71 0.71 0.71
Shadharan Bima corporation 4.38 4.38 4.38 4.38 4.38 4.38 4.37 4.37
Other local shareholders 5.56 6.08 6.29 6.42 6.42 7.53 10.30 9.69
Total 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Figure 1 Distribution of shareholdings in Renata limited

 

Subsidiaries:

Though the firm was established as a subsidiary to Pfizer Corporation, after being renamed, it was operating as a single firm. But after attaining a significant growth in year 2002,2003, and 2004, the company looked forward to diversifying, and with this view, has established two subsidiary companies in 2003-2004, namely- Renata agro limited and Purnava limited.

Business capital:

The business capital of Renata pharmaceuticals were as follows-

Year

 

Authorized capital

 

Issued, subscribed & paid up

Net working capital

 

Mid and long term loans

 

Retained earnings

(Unappropriated profit)

Total

(in Tk.)

Shares issued for cash Shares issued for other consideration Issued as fully paid Bonus share

1996

100,000,000

12,942,600

17,244,900

12,075,000

50,020,549

0

10,179,931

102,462,980

1997

100,000,000

12,942,600

17,244,900

12,075,000

58,660,015

0

28,376,419

129,298,934

1998

100,000,000

12,942,600

17,244,900

16,301,200

52,508,432

0

28,443,550

127,440,682

1999

100,000,000

12,942,600

17,244,900

16,301,200

65,034,178

0

39,571,674

151,094,552

2000

100,000,000

12,942,600

17,244,900

16,301,200

73,812,760

0

59,117,419

179,418,879

2001

100,000,000

12,942,600

17,244,900

16,301,200

118,823,883

0

120,505,000

285,817,583

2002

100,000,000

12,942,600

17,244,900

16,301,200

167,538,678

17,500,008

152,689,300

384,216,686

2003

100,000,000

12,942,600

17,244,900

16,301,200

168,945,660

7,500,008

216,735,815

439,670,183

2004

100,000,000

12,942,600

17,244,900

25,598,900

216,018,791

0

313,458,030

585,263,221

 

Section III-Company Policies

Capital structure

Capital structure refers to the long-term asset mix of the firm, i.e. the mix of equity capital and debt capital. It shows the long-term sources of funds for the firm and is one of the major concerns of the finance manager.

And the capital structure of Renata pharmaceuticals is as follows-

Capital Structure

Position

 Year Long Term Liability Equity  Equity %  Debt %

1996

0

276218829

100%

0%

UNLEVERED

1997

0

285962817

100%

0%

UNLEVERED

1998

0

295619287

100%

0%

UNLEVERED

1999

0

307678722

100%

0%

UNLEVERED

2000

0

331292043

100%

0%

UNLEVERED

2001

0

397851819

100%

0%

UNLEVERED

2002

17500008

446535829

96.23%

3.77%

LEVERED

2003

7500008

467671954

98.42%

1.58%

LEVERED

2004

0

581841450

100%

0%

UNLEVERED

 

Figure 2 CAPITAL STRUCTURE OF RENATA LIMITED

 

 Dividend policy

Dividend means any distribution of the earnings of the firm to its stockholders that result in a cash inflow to the investors. Dividend can be of many forms; i.e. cash dividend, liquidating dividend, stock dividend etc.

Dividend policy refers to making decisions on whether to pay dividend or to retain earnings and if pay dividend, then the amount and timing of dividend. Since dividend represents a cash flow to the shareholders from the firm, the manager have to pay careful attention to this policy.

Usually profitable and high growth firms pay less dividend as they have to retain earnings for investing in growth opportunities. But contrary to that, Renata limited have been paying quite high rate of dividend although enjoying a high growth. The historical dividend pattern of the firm is as follows-

Dividend pattern of Renata limited

Year

1996

1997

1998

1999

2000

2001

2002

2003

2004

Cash Dividend

Total Tk.

0

8,452,500

11,622,175

11,622,175

13,946,610

18,595,480

23,244,350

23,244,350

27,893,200

Stock Dividend

Total Tk.

0

0

0

0

0

0

0

9,297,740

11,157,300

Total Dividend

Total Tk.

0

8,452,500

11,622,175

11,622,175

13,946,610

18,595,480

23,244,350

32,542,090

39,050,500

Cash Dividend Per Share

0

20

25

25

30

40

50

50

50

Stock Dividend Per Share

0

0

0

0

0

0

0

20

20

Total Dividend Per Share

0

20

25

25

30

40

50

70

70

 

The dividend pattern of the company can be better understood form the following charts:

 

Figure 3 CASH AND STOCK DIVIDEND OF RENATA LIMITED (PER SHARE)

 

Figure 4 TOTAL DIVIDEND PAYMENTS BY RENATA LIMITED (PER SHARE)

 

Market capitalization

Market capitalization refers to the market value of total outstanding shares of a firm. It is calculated by multiplying share price with number of outstanding shares. Since share price is the indicator of performance of a company, market capitalization is very important in determining the value of the firm.

The historical market capitalization of Renata limited is as follows-

Market capitalization

Year

1996

1997

1998

1999

2000

2001

2002

2003

2004

Share Capital
Authorized

100000

100000

100000

100000

100000

100000

100000

100000

100000

Issued, Subscribed & Paid Up

422625

422625

464887

464887

464887

464887

464887

464887

557864

Market Price

Not Found

Not Found

375

435

431.5

615.25

650.00

1,216.00

3,200.00

Market Capitalization

174,332,625

202,225,845

200,598,741

286,021,727

302,176,550

565,302,592

1,785,164,800

Changes In Value

16.00%

-0.80%

42.58%

5.65%

87.08%

215.79%

Growth Rate

59.24%

Acceleration Rate

28.45%

 

 

Figure 5 historical market capitalizations

 

Debt financing & Financial risk

From our study of the firm, we have found that the company has enjoyed significant growth and its profitability is quite good. Since profitable firms use less debt as they have greater internal financing, we expect the firm to use less debt in its capital structure. Again, since growth offsets the tax advantage of debt, this also strengthens the argument for using less debt financing. As a result, we see that the firm stayed UNLEVERED for years 1997-2001 and 2004. And in 2003 and 2002, when the company changed its capital structure from Unlevered to Levered the amount of debts was very small in relation to equity.

However, we have found that the company depends quite heavily on short-term debts for operations. And since debt create financial risk, it is important to identify the level of financial risk of the company as these plays an important role on value of the firm.

Here for determining financial risk level of Renata limited, we are using Altman’s z-score model that provides an index of possibility of bankruptcy. Since Renata is a manufacturing company, the appropriate formula for determining the z-score will be-

Z-score = 3.3*(EBIT/Total assets)+1.2*(Net working capital/Total assets) + 1.0*(Sales/Total assets) +0.6*(Market value of equity/Book value of debt) +1.4*(Accumulated retained earnings/Total assets)

Using this formula, the z-score for Renata limited is determined below-

year EBIT total assets net working capital turnover market value of equity book value of debt accumulated retained earnings Altman’s z-score

1998

14922309

518380614

52805432

530303730

174332625

222761327

28443550

1.79

1999

18910705

560274106

65034178

580764244

202225845

252595384

39571674

1.87

2000

41263182

626483232

73812760

663641921

200598741

295191189

59117419

1.96

2001

92781312

730818054

118823883

822795535

286021727

332966235

120505565

2.49

2002

77043909

746465939

167538678

911593846

302176550

299930110

152689300

2.72

2003

131235497

862709160

168945660

1110041348

565302592

395037206

216734815

3.23

2004

183707312

1049725014

216018791

1351797184

1785164800

467883564

313458030

4.82

Decision:

  1. if z-score is more than 2.99, it predicts no bankruptcy.
  2. if z-score is between 1.23 and 2.99, it states that the firm possesses some possibility of being bankrupt.
  3. if z-score is less than 1.23, it predicts a certain bankruptcy.

Our conclusion:  here the z-score of the firm has always been greater than 1.23 and increased over the years and finally have surpassed the 2.99 level. So, we can say that the firm has improved its position and has reduced costs of financial distress over the years.

 

Renata Limited: Ratio Analysis

Calculation of ratios

Year Net profit ratio ROA Roe PE ratio EPS Debt equity ratio Times interest earned Assets turnover ratio Sponsor shareholding ratio

1996

-0.069

0

0

1997

0.041

0

0

1998

0.066

0.067

0.118

8.193

0.458

0

-1.490

1.023

0.51

1999

0.064

0.067

0.122

8.539

0.509

0

1.043

1.037

0.51

2000

0.084

0.089

0.168

5.341

0.808

0

2.932

1.059

0.51

2001

0.129

0.145

0.266

4.124

1.492

0

3.484

1.126

0.51

2002

0.104

0.127

0.212

4.164

1.561

0.058

3.200

1.221

0.51

2003

0.136

0.174

0.322

5.355

2.271

0.013

5.749

1.287

0.51

2004

0.154

0.198

0.358

12.270

2.608

0

3.976

1.288

0.51

 

Interpretations:

Net profit ratio: the net profit ratio shows the proportion of sales revenue that the company earns as net profit. The more the profit is the better is the company’s profitability and efficiency. Although the pharmaceuticals industry is enjoying a high growth, it also observes a hard competition among companies. As a result, much of the company’s earnings are spent for marketing purposes. Keeping this point in mind, we find the company in quite a profitable position.

  1. Return on equity: it shows the percentage of return shareholders gets for each Tk. of earnings. Here the ratio shows that the company is improving its position year by year and the shareholders are expected to get more in the coming years
  2. EPS ratio: the EPS ratio states the per share earnings to an investor. The greater the ratio is, the better will be the company’s position. Here we see that the company has increased its EPS ratio from 45.80% in 1998 to 260.8% in 2004. So the firm has maximized its value over the years
  3. PE ratio: it shows by how many times price of the shares exceeds earnings per share. The greater the ratio the better the company’s financial position. Due to market changes the ratio of the company dropped to near, 4 during 2002 but the company regained and improved it ratio during 2004.
  4. Debt equity ratio: it shows the financial structure of the company Here the company’s ratio shows that the company stayed UNLEVERED for years 1996-2001 and year 2004. And in 2002-2003, the company’s total debt is very small than total equity. So, the company can use its borrowing capacity for further expansion and thus try to maximize firm value.
  5. Times interest earned: it shows the company’s ability to meet interest payments. And Renata’s TIE ratio states that the company now generates enough money to cover interest payments and indicates the firm’s ability to bear more debt.
  6. Return on assets (ROA): it shows how much the investor of the company is earning as return from investing on firm’s assets. This ratio is of particular interest to stakeholders in determining value of the firm. And the company’s ROA is fair in relation to the industry.
  7. Assets turnover ratio: this states whether the company is earning enough to justify its assets. And from the ratio of Renata limited, we conclude that the company is earning enough to justify their assets.
  8. Sponsor shareholding ratio; it shows the proportion of shares held by the sponsor. This is used to indicate the controlling position of the sponsors. If this ratio is more than needed to control the firm, it provides an indication of less agency costs. Here, the ratio for Renata limited is 51%, which indicates that the sponsors are controlling the firm activities, which in turn, asserts less agency costs to the company.

 

Firm value

According to the pie model, firm’s value = value of shares + value of debt + tax + cost of financial distress.

Using this model, the value of Renata limited is determined below-

Calculation of Firm value
Year Stock Debt Tax Cfd Value

1998

174,332,625

0

13,600,000

0

187932625

1999

202,225,845

0

13,763,000

0

215988845

2000

200,598,741

0

18,250,000

0

218848741

2001

286,021,727

0

36,499,324

0

322521051

2002

302,176,550

17,500,008

22,029,962

341709.937

341709937

2003

565,302,592

7,500,008

44,873,677

617682.454

617682454

2004

1,785,164,800

0

62,820,892

0

1847985692

Firm value components

Firm value components (%)
year stock debt tax cfd

1998

92.8%

0.0%

7.2%

0.0%

1999

93.6%

0.0%

6.4%

0.0%

2000

91.7%

0.0%

8.3%

0.0%

2001

88.7%

0.0%

11.3%

0.0%

2002

88.4%

5.1%

6.4%

0.1%

2003

91.5%

1.2%

7.3%

0.1%

2004

96.6%

0.0%

3.4%

0.0%

 

Figure 6 COMPONENTS OF VALUE OF RENATA LIMITED

 

Section IV-Capital Structure & Value

Impact of capital structure on firm value

As we have mentioned previously, a finance manager must know whether the financial decisions are affecting firm value and if do, to what extent in order to achieve the goal of the firm. And among the finance decisions, capital structure decision is one of the most important decisions.

Now, since firm’s size may vary in periods, it would be inappropriate to determine impact of capital structure decision considering financing components in absolute terms. So we are using debt equity ratio, times interest earned ratio and asset turnover ratio for this purpose, since they reflect capital structure and its impacts.

Again, there are several parties related to a firm and they value the firm from different viewpoints. For example, while managers view the firm’s value in terms of profitability, the shareholders may value the firm in terms of returns on equity. For these differences, we are using net profit ratio, return on assets ratio, return on equity ratio and price earnings ratio to represent firm value from various viewpoints. Finally, with the help of regression analysis, we are trying to figure out whether there is a RELATIONSHIP between ratios representing capital structure decision and ratios representing firm value to assess whether the value of the firm is affected by capital structure decisions.

Required information are given below:

Year

Debt Equity Ratio

Times Interest Earned

Assets Turnover Ratio

Net Profit Ratio

ROA

ROE

PE RATIO

1998

0.0000

-1.4896

1.0230

0.0658

0.0673

0.1180

8.1931

1999

0.0000

1.0433

1.0366

0.0645

0.0668

0.1217

8.5395

2000

0.0000

2.9320

1.0593

0.0841

0.0891

0.1685

5.3410

2001

0.0000

3.4841

1.1259

0.1286

0.1448

0.2660

4.1245

2002

0.0579

3.1998

1.2212

0.1038

0.1267

0.2118

4.1643

2003

0.0133

5.7492

1.2867

0.1355

0.1744

0.3217

5.3552

2004

0.0000

3.9756

1.2878

0.1541

0.1984

0.3580

12.2704

Using these information, we get the following results-

Regression Result

Coefficients

F Statistic

Significance

Intercept (a)

Debt Equity Ratio (b1)

Times Interest Earned Ratio (b2)

Assets Turnover Ratio (b3)

Net Profit Ratio (Y1)

-0.19784

-0.52123

0.002935

0.261542

8.139985

0.059379381

ROA (Y2)

-0.37491

-0.6937

0.002151

0.435384

17.76649

0.020545039

ROE (Y3)

-0.63953

-1.56515

0.007015

0.748875

20.54041

0.016742682

P E Ratio (Y4)

-26.5478

-98.4223

-1.45338

33.36757

2.519987

0.233897101

 

Result of regressions:

Regression of net profit ratio on debt equity ratio, times interest earned & assets turnover ratio.

Regression equation:

Y1        = a + b1X1 + b2X2 + b3X3

=  -0.1978 – 0.5212 X1+0.0029X2+0.2615X3

Here Y1 = net profit ratio (NP ratio)

a = constant

X1= debt equity ratio (D-E ratio)

X2= times interest earned ratio (TIE ratio)

X3 = assets turnover ratio (AT ratio)

b1 = coefficient of D-E ratio

b2 = coefficient of TIE ratio

b3 = coefficient of AT ratio

Here b1 = -0.5212 implies that, for 1 % change in debt equity ratio, net profit ratio will change inversely by 0.5212%.

b2 = 0.0029 implies that for 1% change in TIE ratio, net profit ratio will change by 0.0029%

b3 = 0.2615 implies that for 1% change in AT ratio, net profit ratio will change by 0.2615%

Here, The F statistic for regression of net profit ratio on D-E ratio, TIE ratio and AT ratio is 8.139985. And the significance of F statistic is 0.059379, which is more than 5% significance level. Therefore, the results from regression model are not statistically significant. Therefore, we can conclude that the net profit ratio of Renata limited is not significantly influenced by D-E ratio, TIE ratio and AT ratio. So, profitability of the firm is not affected by the mentioned ratios.

Regression of return on assets ratio on debt equity ratio, times interest earned & assets turnover ratio.

Regression equation:

Y2        = a + b1X1 + b2X2 + b3X3

= -0.3749 -0.6937X1+0.0022X2+ 0.4354X3

Here Y2  = return on assets ratio (ROA ratio)

a = constant

X1= debt equity ratio (D-E ratio)

X2= times interest earned ratio (TIE ratio)

X3 = assets turnover ratio (AT ratio)

b1 = coefficient of D-E ratio

b2 = coefficient of TIE ratio

b3 = coefficient of AT ratio

Here b1 = -0.6937 implies that, for 1 % change in debt equity ratio, ROA ratio will change inversely by 0.6937%.

b2 = 0.0022 implies that for 1% change in TIE ratio, ROA ratio will change by 0.0022%

b3 = 0.4354 implies that for 1% change in AT ratio, ROA ratio will change by 0.4354%

The F statistic for regression of ROA ratio on D-E ratio, TIE ratio and AT ratio is 17.76649. And the significance of F statistic is 0.020545, which is less than 5% significance level. Therefore, the results from regression model are statistically significant. Therefore, we can conclude that the Return on assets of Renata limited is significantly influenced by D-E ratio, TIE ratio and AT ratio. Thus, return on assets is influenced by the above-mentioned ratios.

Regression of return on equity ratio on debt equity ratio, times interest earned & assets turnover ratio.

Regression equation:

Y3        = a + b1X1 + b2X2 + b3X3

= -0.6395 -1.5652X1+0.0070X2+0.7489X3

Here Y3  = return on equity ratio (ROE ratio)

a = constant

X1= debt equity ratio (D-E ratio)

X2= times interest earned ratio (TIE ratio)

X3 = assets turnover ratio (AT ratio)

b1 = coefficient of D-E ratio

b2 = coefficient of TIE ratio

b3 = coefficient of AT ratio

Here b1 = -1.5652 implies that, for 1 % change in debt equity ratio, ROE ratio will change inversely by 1.5652%.

b2 = 0.0070 implies that for 1% change in TIE ratio, ROE ratio will change by 0.0070%

b3 = 0.7489 implies that for 1% change in AT ratio, ROE ratio will change by 0.7489%

The F statistic for regression of ROE ratio on D-E ratio, TIE ratio and AT ratio is 20.54041. And the significance of F statistic is 0.016743, which is less than 5% significance level. Therefore, the results from regression model are statistically significant. Therefore, we can conclude that the Return on equity of Renata limited is significantly influenced by D-E ratio, TIE ratio and AT ratio. Thus, return on equity is influenced by the above-mentioned ratios.

Regression of price earning ratio on debt equity ratio, times interest earned & assets turnover ratio.

Regression equation:

Y4        = a + b1X1 + b2X2 + b3X3

= -26.5478 -98.4223X1 -1.4534X2 +33.3676X3

Here Y4  = price earning ratio (P-E ratio)

a = constant

X1= debt equity ratio (D-E ratio)

X2= times interest earned ratio (TIE ratio)

X3 = assets turnover ratio (AT ratio)

b1 = coefficient of D-E ratio

b2 = coefficient of TIE ratio

b3 = coefficient of AT ratio.

Here b1 = -98.4223 implies that, for 1 % change in debt equity ratio, PE ratio will change inversely by 98.4223%.

b2 = -1.4534 implies that for 1% change in TIE ratio, P E ratio will change inversely by 1.4534%

b3 = 33.3676 implies that for 1% change in AT ratio, P E ratio will change by 33.3676%

The F statistic for regression of P-E ratio on D-E ratio, TIE ratio and AT ratio is 2.519987. And the significance of F statistic is 0.233897, which is more than 5% significance level. Therefore, the results from regression model are statistically not significant. Therefore, we can conclude that the P-E ratio of Renata limited is not significantly influenced by D-E ratio, TIE ratio and AT ratio. And since P-E ratio reflects the value of the firm we can say that the value of Renata limited is not significantly influenced by the capital structure decision of the firm.

 

Findings:

From the above calculations, we have the following findings-

i. The capital structure decision of Renata limited has no significant impact on its profitability.

ii. Return on assets is significantly influenced by capital structure decisions. So, capital structure decisions are important to its stakeholders in determining value of the firm in terms of returns on assets.

iii. Capital structure decision has significant impact on return on equity. So, from the viewpoint of equity holders, capital structure decision affects firm value

iv. The price earnings ratio is not significantly affected by capital structure decisions. So, capital structure decisions have very little or insignificant influence on firm value, from the market perspective.

 

Our over view

In current business world, it is important to decide about  a firm’s capital structure and dividend policy in order  to achieve the goal of finance. And in case of making financial decisions, we must consider the possible impacts of these decisions on firm value.

Here we have tried to determine several financial aspects of Renata limited. We have also tried to focus on the impacts of financial decisions on firm value. As we have seen from our studies, the firm’s future prospect is quite bright as it enjoys good profitability and a high growth. Its market capitalization is growing @ 59.24% with an acceleration rate of 28.45%. besides, as it is a high growth profitable firm, we found that the firm uses very low level of debt occasionally. Again, due to efficient management of the company, its cost of financial distress is also less. Finally, through several analysis, we have found that the value of the firm is affected by its capital structure decision from the perspective of stakeholders but its profitability is not affected by such decisions.

So, we can say that  the capital structure decision of Renata limited has a significant impact on the value of the firm.

 

Bibliography

  1. Ross, Westerfield, And Jaffe. “Corporate Finance”, 7th Edition,, P-845-846.
  2. Gitman, “Managerial Finance”.
  3. Weygandt, Kieso, Kimmel, “Accounting Principles”, 6th Edition, P-779.
  4. Arens & Loebbecke, “Auditing: An Integrated Approach”,7th Edition, P-198-202.

 

Glossary

 

  • Business capital: business capital refers the amount of capital that a firm uses to conduct business. Usually it consists of paid up capital, net working capital, retained earnings, mid & short term loans and paid up preferred capital.
  • Capital structure: the long-term assets mix of a firm, i.e. the mix of equity and debt capital.
  • Dividend: any type of earnings distribution to shareholders that result in additional cash flow to shareholders.
  • Market capitalization: total market price of outstanding shares
  • Unlevered firm: firm that uses no debt capital.
  • Levered firm: firm that uses debt in it’s capital structure
  • Financial risk: risk of becoming unable to meet debt obligations.
  • Costs of financial distress: risk of having financial distress due to debt financing
  • Net profit ratio: net profit / turnover
  • ROA : turnover/ total assets
  • ROE: turnover / total equity
  • EPS: earnings to shareholders / number of outstanding share
  • PE ratio: price per share / earnings per share


 

 

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