Marketing assignment essay help on:  Guinness Anchor Berhad 

Introduction

The public limited company chosen for this study is Guinness Anchor Berhad – GAB. The company was formed in 1989. The parent companies were the Malayan Breweries Ltd, which is now known as Asia Pacific Breweries Ltd, and Guinness Overseas Ltd – GOL (GAB, 2007). The world’s leading premium drinks Group – Diageo Plc owns the GOL with its renowned collection of brands across spirits, wine and beers. The brewery of GAB operates and produces Guinness, Tiger, Heineken, Anchor Smooth, Anchor Strong, Kilkenny, Anglia Shandy and Malta. The production takes place at the Sungei Way Brewery, the operations began back in the 1965. (GAB, 2007)

This paper shall study and analyze the financial management decision style of the company, through references of its released annual reports and statements of accounts obtained through its official website.

Question 1

Discuss the different long-term sources of finance available to companies and theories that discuss their risk/return characteristics and optimum capital structure. With reference to the accounts then discuss the long term capital structure of the chosen company and what this may indicate about the company’s attitude to risk. You may need to refer to the specific note in the notes to the accounts to get detailed information on this.  Part of your answer to this question should include calculation of a suitable gearing ratio.

Long Term Finances

Long term finances are said to be the necessity of a business, generally referring to funds with period of exceeding 5 years and approaching 10 years. (Shim & Siegel, 2008) Long term financing is used to finance long lived or permanent assets such as land, equipment, machinery and construction etc. A company needs more long term financing if it is capital intensive in nature. The type of long term finances a company has is known as its capital structure. There are varied sources for long term finance, for instances, share capital or equity share, preference shares, retained earnings, debentures, loans, asset securitization and international financing etc. Share capital as among the finance sources, differentiates at ordinary shares and preference share. Preference shares are said to be offered without voting rights, but its potential is unlimited, higher risks which require higher rate of return. The preference shares are lower risk level, and of course it results lower returns, and it is not used at extensive level seeing the implications of tax occurred. The ordinary shares can be a right issue which existing shareholders shall obtain a right to purchase new shares based on their shareholding in the company.

The ideal capital structure of the company should be such that it maximizes the total value of the company and minimizes the risk and cost of capital. (Bierman, 2003) Before formulating policies regarding the capital structure of the company it is necessary to take into consideration the following factors

è Nature of the business and that of the industry

è The strategic aims and goals of the company

è The current capital structure and the ideal capital structure

è The required growth rate etc.

Ways to Finance Long Term Assets

Debentures

Debentures are loans raised from public, whereby its issuance lies on the basis of debenture trust deed which shall state terms and conditions on which debentures are floated Debentures can be secured or unsecured The cost of capital raised from debentures is quite low as the interest payables on debentures are charged as expense before tax The investors believe debentures shall be its lucrative position to offer compared to that of the preference shares especially when the interest on debentures is made payable on the basis that if the company makes a profit There are three main categories of debentures: non-convertible, fully convertible and partly convertible. (Sheeba, 2003) Non-convertible debentures do not own conversion features and it is repayable upon maturity; fully convertible owns the conversion features, which could be converted to equity shares as per the terms of issue in relation to price and the time required to convert The convertible nature of fully convertible debentures has lower interest rates compared to the non-convertible ones. The partial convertible debentures comprises both either non-convertible or fully-convertible nature. Debentures dilute the equity holding until the capital raised has begun earning an added return to support the additional shares. Debentures are possible even when the equity market is not doing good, whilst the convertible bonds’ unsecured nature making it with no effect impair on the borrowing capacity. The benefits cover the low cost and its safe nature; whilst its setbacks, considering payment upon maturity, thus shall need larger sum of cash outflow, and it is believed that debentures financing shall enhance the financial risk associating to the firm. (Swart, 2007)

Bank Borrowing

Borrowing from bank institutions or loans from banks shall act as the long term financing source. The lending banks available for companies shall comprise across commercial banks or some other financial institutions. The lending bank thus will ask for security and the borrowing bank will need to pay interest based on a fixed or a floating rate. (Brigham & Ehrhardt, 2008) In the context of India’s business markets, there are several specialized institutions established to provide long term financial assistance to specific industries. For instances the available institutions shall include the Industrial Finance Corporation of the India, the State Financial Corporations, the Life Insurance Corporation of India, the National Small Industries Corporation Limited, the Industrial Credit and Investment Corporation, the Industrial Development Bank of India, and the Industrial Reconstruction Corporation of India, which these shall provide term loans to companies. Similarly if applicable to Malaysia context, loan from bank institutions normally are offered at differentiated rates and interest applicable to different schemes compromised, also the repayment shall be made in accordance to stipulated repayment schedule. Commercial banks normally offer longer terms loan only in the condition to support for the purpose of expansion or setting up of new units as to which the liquidity is largely dependable on the anticipated income of the borrowers. (Meesook, 2001)

Retained Earnings

Retained earnings are undistributed profits accumulative over the years which can be applied as long term source of finance (Gibson, 2011). Its significant advantage being having no cost applied to the firm unless if the shareholders having impatience and dissatisfaction for longed waiting but yet to see returns. These funds belong to the shareholders which of course firstly their consent ought to be received in order to proceed taking retained earnings as one of the financing source. A public limited company is said to must plough back a reasonable amount of profit every year of its business to keep in view the legal requirements also to watch for its expansion plans

Gearing Ratio

Total Liabilities / Total Assets 168,522,000 / 685,138,000 = 0.25 Theoretically, debt ratio ranges from 0 to 1, however the lowest shall be most favorable. GAB’s debt ratio is 0.25 which is good in the context that less than half portion of the company’s assets are claimed by creditors, entails lower risks associated in operation. That would be no problem to attain for loans for new projects.Debt to Equity Ratio Total Liabilities / Shareholder’s Equity 168,522,000 / 516,616,000 = 0.33 Theoretical guided that a lower value is favorable as it shall indicate lesser risks. Higher value shall define that the business relied heavily on external lenders hence shall impose larger risks. GAB has a 0.33 debt to equity ratio, in other term, the leverage ratio, and that is wise and good.

Question 2

Discuss relevant working capital management theories. Then calculate suitable working capital ratios and discuss how efficiently the company is managing its short-term sources of finance.

Working Capital

Traditionally working capital was defined as the company’s investment in current assets; current assets being the assets which can be liquidated within a year. However, with time the definition of working capital has changes; now it also includes current liabilities in the equation. Net working capital is denoted as the difference between current assets and current liabilities.

Net working capital = current assets – current liabilities

Working capital is as important for the company as the long term finance, since working capital takes care of the day to day needs of the business. It ensures that the operations run smoothly without any hassles. In order to utilize the long term assets effectively it is necessary that the company has an uninterrupted flow of short term funds. For instance; if the company does not have adequate raw materials its machineries will stand idle and no company can afford to lose productivity.

Working capital management has two aspects

1)    Managing the organizations current assets

2)    Managing the use of current liabilities

Maintaining a balance between the two is of utmost importance or else the organization cannot be effective in its operations. The ideal ration between current assets and liabilities is 2:1; which is to say that current assets should always be double the current liabilities. This ensures that the company will have just the right amount of current assets to take care of its routine operations and to meet any unexpected requirements.

To ascertain the working capital efficiency of the firm the following ration has to be calculated

Working capital ratio = Current assets

                                  Current liabilities

The total current assets of the group are 451,909

The total current liabilities of the group are 135,930

Working capital ratio = 451,909

                                    135,930

   =    3.32

The ratio indicates that the current assets of the company are more than three times the current liabilities. This is not a very conducive situation because the company has a lot of funds blocked in its current assets. The blocked funds can be put to better use. Another disadvantage of having funds blocked in assets such as raw materials is that if the company is in dire need of cash, it will take to liquidate the current asset which is again not desirable.

Question 3

Discuss the range of dividend policies available to companies, why certain companies may choose certain policies and what sort of dividend policy the directors of the company seem to be following and possible reasons for this.

Dividend Policy

Dividend policy decides the amount of earnings to pay out dividends which is among the decision makings managers shall face. It should consist of three elements: high or low payout, stable or irregular dividends, frequent of payouts and policy announcement. Upon those elements, there are theories to define and indicate whether the payouts initiated shall be placed low or high. Generally there are three theories: dividends are irrelevant – investors do not consider payouts, bird in the hand – investors prefer higher payout, tax preference – investors prefer lower payout (Husam, Rafferty & Pillai, 2010). The dividend irrelevant theory indicates the  investors’ indifference between dividends and retention-generated capital gains; they shall sell stock if they pursue cash whilst otherwise they can use dividends to buy stock (Husam, Rafferty & Pillai, 2010).

The Modigliani-Miller theory assumes that in a perfect capital market, the dividend paid the firm will not affect the value of the share; however it is unrealistic to assume that the share value will remain unaffected. (Constantinides & Stulz, 2003) The bird-in-the-hand theory shows that investors seek lesser risks in future capital gains hence they will value high payout. The tax preference entails that retained earnings lead to long term capital gains with tax imposed at lower rates than dividend, which means capital gains taxes are deferred; hence investors favor low payouts (Husam, Rafferty & Pillai, 2010). Different investors shall apply difference policies and also it depends on the company’s historical practices.

The residual dividend model policy defines the payout on any leftover earnings, which are the residuals as the dividends. (Brigham & Daves, Intermediate Financial Management, 2010) Better investments would lead to a lower dividend payout, which this policy minimizes new stock issues and flotation costs; however increases risk and appears conflicting.

Dividends of GAB

As after the reporting period, the Directors recommended declaration of net final dividend of 44 cents per 50 cents stock unit, tax exempt under the single tier tax system, totaling RM 132,923,120. That will be recognized in subsequent financial period upon company owners’ approval.

Question 4

Assess the profitability of the company and how attractive it appears to be to potential investors. Your answer should include some discussion of the risk/return trade-off for different types of investors.  

Financial scholars have provided us with a number of ratios to ascertain how profitable or effective an organization is. Creditors and investors are primarily interested in ratios which determine the profitability and liquidity status of the company. Given below are the ratios calculated for GAB

Operating Profit before deducting interest and tax (EBIT) / Revenue 2011 240,598,000 / 1,488,720,000 = 0.16 2010 203,332,000 / 1,358,633,000 = 0.15 Return on sales evaluates the company’s operating performance and as compared the year 2010 and 2011, the ratio increases from 0.15 to 0.16  and hence seeing GAB is gradually becoming more efficient.Return on Equity (ROE) Net income after tax / Shareholder’s equity2011 181,632,000 / 516,616,000 = 0.35 2010 152,487,000 / 470,928,000 = 0.32 Return on equity reveals the profit earned by the company in comparison to the total shareholder equity. GAB has a ROE ratio at 0.35 in year 2011, comparing to 2010 at 0.32, showing an increasing performance.

The ratios depicts that there is a steady growth in the profitability of the company and hence GAB poses as an attractive investment opportunity.

Risk Return and Trade off

Risk and return are two phases of a same coin; if an investor is looking for return he has to bear risk. Invariably, with high risk comes a greater return. There are various types of risk an investor faces; business risk occurs when the business faces general business conflict and especially when there are changes in demands, input prices, and obsolescence due to advent of technology (Sachse, Jungermann & Belting, 2012). Liquidity risk entails the possibility of an asset could not be sold within a short period for its market value, risk imposed when it has to be sold at higher discounts (Gannon, 2008). Default risk defines when an issuing company failed to make interest payments on debt (Sachse, Jungermann & Belting, 2012). Market risk outlines the correlation of stocks prices where a change in the stock price shall result changes in the stock market as a whole (Gannon, 2008). Interest rate risk refers to the overly volatile market with high fluctuations in the value of an asset when interest rates and money values change. It associates closely with bonds and fixed income securities; for instances, bond price rise if the interest rate falls.

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