Accounting management report writing help on: Debt and equity relationship – Origin energy
Q?? Write a report on debt and equity relationship in Origin energy??
Solution:
Introduction
This report has been analyzed on the debt and equity relationship in order to find out that the debt is a substitute of equity or not. The role of internally generated funds has been analyzed in the long term financing and examination of steps taken by the Origin Energy Ltd in order to finance its growth opportunities.
Numerical
Q.1.) You have just won a magazine lottery and have a choice between three alternatives. You can get $100,000 now, or $10,000 per year in perpetuity, or $50 000 now and $150,000 at the end of 10 years. If the appropriate discount rate is 12% per annum, which option should you choose?
Answer It can be seen that after done the analysis of three options, it is advisable for the investor to go for $ 150000 in 10 years because on funds 150000 he is going to receive 12% per annum that is 18000 every year. It can be seen that with assured amount of 150000 he is going to get 18000 every year.
Q.2.) You have just purchased a car from “Friendly Sam.” The selling price of the car is $6,500. You pay $500 deposit, then your monthly payments are $317.22. The interest rate is 24% per annum, compounded monthly. How many payments must you make?
6000 = 317.50 (1+0.24/12) n^12
6000= 317.50 (1.02)n^12
6000/317.50 = (1.02)12n
18.89 = (1.02) ^12n
Q.3.) You have just received an inheritance of $32,976. You plan to put the entire amount in an account earning 8% compounded annually and to withdraw $4 000 at the end of each year. How many years can you continue to make the withdrawals? Assume that the first withdrawal will be made in one year’s time.
The amount at the end of the year at 8% compounded annually would be 32976(1+0.08)
= 32976(1.08)
= 35614.08
The amount becomes 35614.08 at the end of the first year after investing at 8% compounded annually and after withdrawal of 4000 then amount left would be 35614.08-4000 = 31614.08. The amount left after the first withdrawal is 31614.08 then again invest this amount at 8% compounded annually at the end of second year. Approximately 8 years would be taken by the investor to make such withdrawals.
Q.4.) You are saving money to buy a house. You will need $7,473.50 to pay the deposit. If you can invest $500 at the end of each month in a savings account which pays 1% per month, how long will it take you to save the $7,473.50?
It can be seen that if the amount 500 is invested at 1% p.a. monthly then amount would become at the end of the month is 505. If rate of interest is 1% per month then for yearly it becomes 12% per annum and the amount 500 would become 560. Hence for saving the amount of $ 7473.50 the investor would need approximate 13 years.
Q.5.) If your opportunity cost is 10% per annum, how much are you willing to pay for an investment promising $750 per year for the first four years and $450 for the next six years? Assume that all cash flows are received at the end of each year
= 750 * PVIFA (10%, 4) + 450*PVIFA (10%, 6)
= 750 *3.160 + 450 * 4.355
= 2370 + 1959.75
= 4329.75
Q.2.) (i) In long-term financing, what are internally generated funds? What are their advantages as a source of funds?
It can be seen that the internally generated funds in the long term financing are the dominant funds. It is very clear that the 85% of the funding is done through from existing and past profits. It can be seen that primary use of internally generated funds is capital expenditure. The Corporations are the net issuers of different securities (Greenwood & Jovanovic, 1990). It can be seen that high usage of the Debt is not flexible and flexibility is not required for companies to choose high form of debt. It is very clear that short term debenture offers early investment evaluation. The function of the financial structure is to restrict the limits on opportunistic kind of behavior by providing excess cash flow and offer incentives for outside controlling. At last, it can be say that the internally generated funds play as the role of the dominant funds in the long term financing and offer excessive cash flow and benefits for outside controlling and monitoring. It is very clear that the initiation of the public and private company is done primarily with debentures. It is very clear that high type of debt offers greater control over the managers and minimizes free cash flow under management control, concentrates on voting & control of equity by equity investors of LBO.
Q.2.) (ii) critically evaluate whether debt is a substitute of equity (max. 800 words).
It can be seen that equity and debt are not considered as substitute source of finance; even both equity and debt have considered as complementary mode of finance. It is very clear that ratio of leverage of the company is dependant upon financial & operational activities inclusive of profits, working capital, inventories and sales. It can be assumed that the company establishes its business only with equity financing at the starting level. It is very clear that Equity is a beginning part of the capital of the Company and the Company cannot survive without equity. The type and nature of the business, the Company’s managerial structure &its financing through equity are constantly evaluated at the initiation phase of the business. It is analyzed that type & nature of the business, managerial structure & beginning equity evaluates the structure and kinds of assets and liabilities constantly. In general, investments in working capital & fixed assets depend upon the coordination of distinct variables. The patterns of the investment help in finding out of the different financing patterns. The capital employed is the main portion of the financial structure and it comprises of only debt & equity. It is very clear that Equity Shareholders fund is the summation of the reserve funds & Share Capital. In general there are 2 conditions for greater amount of reserve funds such as higher profit in the past and present & less ratio of pay out. It can be seen that the Equity Capital can be issued through summation in ordinary Capital. Bonus Shares and Right Issue are two potential methods for summation in type of paid up capital. It can be seen that if dilution in EPS is ignored in the upcoming time, then it forms the financing perspective, and Bonus shares are treated as another retained earnings. It can be observed that enhancement in net equity by retained earnings shall mot alter the types of shares. The importance of debt & equity markets changes with different phases of economic development. When the economy becomes developed, controlling turns out expensive in relation to cost of capital. It can be seen that technologies, which involve comparatively costs are chosen. It can be seen that equities have observable returns and they have few monitoring costs. If the economy grows, the activity of the equity market enhances in relation to the market activity of the debt. The markets of equity and debt can be recognized as substitutes as economic & financial development occurs (Bencivenga & Smith, 1991).It can be seen that markets of both equity & debt are associated with the existing and upcoming economic growth. There is continuing debate among theory & relation empirics among the types of economic development & external financing. The theory proves that the markets of debt & equity are substitutes throughout the economic development process and researchers suggested that both have distinct roles as they are complement to each other. To understand the association among the economic development and financial system, there should be models so that market of the stock & banks develop continuously (Levine, 1991). The increase in capital employed with debt financing is not generally in the hand of the Company. It is analyzed that any alteration in the equity is easier than any alteration in the debts because the financing of the debt is mainly dependant upon external factors (Boyd & Smith, 1998).These external factors like interest rate must be less than ROE; Internal Debts should generate the funds above the depreciation and pension fund, funds availability defines the situation of the liquidity in market of the debt and accessibility of funds is also significant in debt financing, government regulations, Debt raising procedure and consequences of social and political. It is very clear that both equity and debt are distinct in nature. The debentures have a definite life. In general, the redemption period of the debentures always affects the decisions of the investment. The debenture redemption always remains in the manager mind when they take a decision about the purchase of the asset. It can be seen that fixed and cost of the debenture is an important consideration. Debt & equity affect distinct assets in distinct ways. Even surplus funds & paid up capital influence assets in various ways. It can be seen that for different types of assets, Companies prefer distinct types of financing. The mixture of equity & debt may change from Company to Company. The debenture cannot be treated as the substitute of the equity. This shows that financial department of the Company requires the whole system of monetary and financial rules must be changed. It is advisable for Companies to use mixture of debt and equity which would help in the efficient distribution of the financial resources.
Q.2.) iii.) Critically examine the steps that Origin Energy Ltd. is planning to take to finance their growth opportunities.
It can be seen that the Origin Energy Limited is a conventionally managed group of energy with the recognized portfolio of conducting business in generation of the energy and mixture of different projects of energy reserves inclusive of LNG development, reserves of Coal Gas & renewable energy. It can be seen that Origin Energy Limited views towards the sustainable approach for developing the progress of the business. The focus of the company on the maintenance of its position as a top Australian coordinated energy which indulges in various segments of the management of the supply chain. The company views to deliver leading performance for the shareholders by developing, recognizing and conducting business which provide excellence to numerous customers. The Company also concentrated on development and procurement of the competitive types of energy & related service & product to meet the energy needs of the customer. It has been analyzed that the Company had reported a loss of $ 136 for the year ended on 31st Dec 2010. The loss contained a numerous items that did not show the underlying performance and efficiency of the business included the impairment of the investments of the Company in the Geodynamics, alteration in the market value of financial products & costs of the transaction inclusive of stamp duty related with the Company currently announced but not the takeover of the Government NSW assets of the energy. It has been analyzed that Envestra & Origin Energy ltd have a distinct capital cost because Origin Energy Ltd is a greater risk business which competes for users & undertake a number of risky projects throughout the supply chain, whereas Envestra conducts monopoly assets. It can be seen that greater risky business depends more on equity finance which is expensive. It is analyzed that Origin Energy Ltd had created its assessment of the impact of the cost on future payments and it was in more of the prediction of the cost done by the ESCOSA. The Origin Energy & Envestra business have different types of business and models of funding and it complex to analyze that the mode of alternative payment is cost impartial for the customer. In 2010, the Origin Energy had 25% gearing ratio as compared to Envestra which had 74% gearing ratio. It has been analyzed that the Company financial performance had improved in the year 2010 as compared to last year 2009; the cash flows from operating activities had increased in 2010 from 479m to 817m this shows that the company financial condition had improved. At last, the steps taken by the Company in planning to finance its growth opportunities like the company decided to provide a leading performance to the shareholder by recognizing and analyze business that provide excellence to customers. The company has undertaken a number of risky projects throughout the supply chain (Cooley & Smith, 1998).The company had done the prediction of the cost of the capital and its impact on advance payments. Even, the Company had adopted different modes of payment and that are impartial to the customer. It can be seen that Origin Energy is a risky business and that’s depends more on equity financing as compared to debt financing. To finance the growth opportunities the company decided to do the financing from the equity.
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