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i have a similar excel for a different project because i want to make the similar one but for the this word project.

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Running Head: COST OF CAPITAL & FINANCIAL PERFORMANCE 1 Table of contents Contents Introduction ..................................................................................................................................... 2 Objective 1 ...................................................................................................................................... 2 Case study #1 Social disclosure, financial disclosure and the cost of equity capital.................. 2 Case study #2 Environmental risk management and the cost of capital ..................................... 4 Case study #3 The Impact of Capital Structure on Financial Performance of the Firms: Evidence From Borsa Istanbul .................................................................................................... 6 Objective 2 ...................................................................................................................................... 8 References ..................................................................................................................................... 10 COST OF CAPITAL & FINANCIAL PERFORMANCE 2 Cost of Capital & Financial Performance Introduction The cost of capital is a variable that reflecting the amount of money invested. In most cases, a portion of cost of capital is coming from debt. Companies with massive cost of capital are most likely to have a large debt. Most researchers found that the large cost of capital may affect the financial performance negatively. In this paper, three research articles which studied these two variables are discussed. Also, three Saudi companies will be compared in order to determine which company is making the best performance. Objective 1 Reviewing three research papers and discussing them, the research articles are studying the relationship between the cost of capital and its impact on financial performance. Case study #1 Social disclosure, financial disclosure and the cost of equity capital APA reference: Richardson, A. J., & Welker, M. (2001). Social disclosure, financial disclosure and the cost of equity capital. Accounting, Organizations and Society, 26(7-8), 597–616. Original case “Article’s abstract” We test the relation between financial and social disclosure and the cost of equity capital for a sample of Canadian firms with year-ends in 1990, 1991 and 1992. We find that, consistent COST OF CAPITAL & FINANCIAL PERFORMANCE with prior research, the quantity and quality of financial disclosure is negatively related to the cost of equity capital for firms with low analyst following. Contrary to expectations, there is a significant positive relation between social disclosures and the cost of equity capital. This positive relationship is mitigated among firms with better financial performance. We consider some biases in social disclosures that may explain this result. We also note that social disclosures may benefit the firm through its effect on organizational stakeholders other than equity investors. 1. Research Question: what is the relation between financial and social disclosure and the cost of equity capital? (the sample is Canadian firms in the end of the years 90, 91, 92. 2. Variables: • Quality of financial disclosures “dependent” • Quantity of financial disclosures “dependent” • Cost of equity capital “independent” • Social disclosures “dependent” (The determination of relationship was measured by analyzing the financial performance) 3. Hypothesis Testing: • Null hypothesis: financial disclosure and cost of equity capital are inversely related • Alternative hypothesis: financial disclosure and cost of equity capital are predicted to have a directly related 3 COST OF CAPITAL & FINANCIAL PERFORMANCE 4 4. Results & Analysis: The results apply to the null hypothesis, the results of the study showed that the quantity and quality of financial disclosure are negatively related to the cost of equity capital. 5. Conclusion: the relationship has a positive impact, can be seen with better financial performance. 6. Limitations & future scope: • Limitation: the study was made using annual reports, not necessarily to be reflecting the truth • Future scope: research using the data set over a complete business cycle. Case study #2 Environmental risk management and the cost of capital APA reference: Sharfman, M. P., & Fernando, C. S. (2008). Environmental risk management and the cost of capital. Strategic Management Journal, 29(6), 569–592. Original case “Article’s abstract”: “Our study of 267 U.S. firms shows that improved environmental risk management is associated with a lower cost of capital. Our findings provide an alternative perspective on the environmental‐economic performance relationship, which has been dominated by the view that improvements in economic performance stem from better resource utilization. Firms also benefit from improved environmental risk management through a reduction in their cost of equity capital, a shift from equity to debt financing, and higher tax benefits associated with the ability COST OF CAPITAL & FINANCIAL PERFORMANCE 5 to add debt. These findings help build better theory regarding the outcomes of strategic improvements in environmental risk management.” 1. Research Question: What are the impacts of reducing the cost of capital in the process of risk management? Will risk management be harmful or beneficial? 2. Variables • Debt “independent” • Cost of capital “independent” • Environmental risk management “dependent” • Financial performance “dependent” 3. Hypothesis Testing • Null hypothesis: o Hypothesis 1: environmental risk management and cost of capital are inversely related o Hypothesis 2: environmental risk management and cost of equity are inversely related o Hypothesis 3: environmental risk management and WAAC are inversely related • Alternative hypothesis: o Hypothesis 1: environmental risk management and cost of capital are directly related o Hypothesis 2: environmental risk management and cost of equity are directly related COST OF CAPITAL & FINANCIAL PERFORMANCE 6 o Hypothesis 3: environmental risk management and WAAC are directly related. 4. Results & Analysis: applicable to null hypothesis, the environmental risk management may be beneficial to the firm. 5. Conclusion: environmental risk management increase the cost of debt capital, it does by the fact of increased leverage, hence increasing the tax subsidies resulting from debt financing and potentially improving the firm’s overall economic performance. 6. Limitations & future scope Limitations: the study was made in the USA, it may not apply in other countries such as Australia. Also, the lack of robustness of the results. Future scope: in future researches, the examination of the cost of debt funding is a topic to focus on. Case study #3 The Impact of Capital Structure on Financial Performance of the Firms: Evidence From Borsa Istanbul APA reference: Nassar, S. (2016). The impact of capital structure on Financial Performance of the firms: Evidence From Borsa Istanbul. Journal of Business & Financial Affairs, 5(2). Original case “Article’s abstract”: “The paper tries to examine the impact of capital structure on the financial firm performance of industrial companies in Turkey. the annual financial statements of 136 industrial companies listed on Istanbul Stock Exchange (ISE) were used for this study which covers a period of 8 years from 2005-20012. A multivariate regression analysis is applied to test the COST OF CAPITAL & FINANCIAL PERFORMANCE 7 relationship between capital structure and firm performance. To measure firm performance used indicators such as Return on Asset (ROA), Return on Equity (ROE) and Earning per Share (EPS) as well as Debt Ratio (DR) as capital structure variable. The results show that there is a negative significant relationship between capital structure and firm performance.” 1. Research Question: What is the impact of capital structure on the financial firm performance? *for industrial firms in Turkey 2. Variables: • capital structure “independent” • firm performance “dependent” The firm performance was measured by analyzing indicators such as: o Return on Assets o Return on Equity o Earnings per Share o Debt Ratio “the cost capital variable” 3. Hypothesis Testing • Null hypothesis: the relationship between capital structure and financial performance is negative (ROA, ROE, EPS). • Alternative hypothesis: the relationship between capital structure and financial performance is positive (ROA, ROE, EPS). 4. Results & Analysis: the relationship between the capital structure and financial performance is negative, financial firm performance is defined by (EPS, ROE, and ROA). The high use of debt will affect the organization negatively. COST OF CAPITAL & FINANCIAL PERFORMANCE 8 5. Conclusion: there is a negative relationship between capital structure and financial performance 6. Limitations & future scope Limitations: studied in only one market, made on relatively short duration “eight years Future scope: comparing the capital structure and firm performance in the future research for small & large organizations. Objective 2 Determining which company is raising the capital most effectively. (The data is gathered from Tadawul & WACC expert) The compared three companies are leading companies in the field of materials in the Saudi stock market, debt & equity are indicators of cost of capital. The strength of stock price is an indicator of financial performance. Table 1: comparison between 3 Saudi companies, the currency is SAR Company’s Name Filing and Packing Arabian Cement Saudi Arabian Materials Company Mining Company Manufacturing Company Category Materials Materials Materials Stock price 33,75 25,80 33,6 Equity 155,515,000 2,883,009,000 30,655,543,000 Debt (increase in -3,535,000 -72,957,000 -2,513,795,000 COST OF CAPITAL & FINANCIAL PERFORMANCE 9 debt) Debt to equity ratio 0.0227 0.025 0.11 WACC1 9.85% 9.85% 9.85% WACC = (Cost of stock * % stock) + (cost of preferred stock * % preferred stock) + (cost of debt * % debt (1-tax rate)) Answer: Filing and Packing Materials Manufacturing Co., it has a strong stock price and the lowest amount of debt compared to equity. 1 This value is the WACC for Construction & materials companies in Saudi Arabia. Source: WACC expert. COST OF CAPITAL & FINANCIAL PERFORMANCE 10 References Arabian Cement Co. (n.d.). Tadawul. Retrieved from: https://www.tadawul.com.sa/wps/portal/tadawul/market-participants/issuers/issuersdirectory/companydetails/!ut/p/z1/pZDLjoJAEEW_xQXrvjSI6K4FB3pAElR89MY0Y8Yh4bVgNPr1toNiTJjrF0l59xKXSLIkohS7rKtbLKqlLnaV8JaR37oLBp4I1mBpjljp1JxCkAsrgAlDq23jcRIuzpCvDA47FpIDaIeMn3eNQDi5k__5gr1KbvTD_5-PJMPzlfxKxzav0WtVP09QDDRoauZH731xTldV1LI8TA9FWimI6vb5qLjPhU9dlTsKAtfpUgy7N6Ct13vgQXGtwLmZC9Dyel0kSbI8 ht9TnnHW6ZwA2k5rzg!!/ Calculate your WACC (n.d.). WACC Expert. Retrieved from: http://www.waccexpert.com/ Filing and Packing Materials Manufacturing Co. (n.d.). Tadawul. Retrieved from: https://www.tadawul.com.sa/wps/portal/tadawul/market-participants/issuers/issuersdirectory/companydetails/!ut/p/z1/pZDLjoJAEEW_xQXrvjSI6K4FB3pAElR89MY0Y8Yh4bVgNPr1toNiTJjrF0l59xKXSLIkohS7rKtbLKqlLnaV8JaR37oLBp4I1mBpjljp1JxCkAsrgAlDq23jcRIuzpCvDA47FpIDaIeMn3eNQDi5k__5gr1KbvTD_5-PJMPzlfxKxzav0WtVP09QDDRoauZH731xTldV1LI8TA9FWimI6vb5qLjPhU9dlTsKAtfpUgy7N6Ct13vgQXGtwLmZC9Dyel0kSbI8 ht9TnnHW6ZwA2k5rzg!!/ COST OF CAPITAL & FINANCIAL PERFORMANCE 11 Nassar, S. (2016). The impact of capital structure on Financial Performance of the firms: Evidence From Borsa Istanbul. Journal of Business & Financial Affairs, 5(2). Richardson, A. J., & Welker, M. (2001). Social disclosure, financial disclosure and the cost of equity capital. Accounting, Organizations and Society, 26(7-8), 597–616. Saudi Arabian Mining Co. (n.d). Tadawul. Retrieved from: https://www.tadawul.com.sa/wps/portal/tadawul/market-participants/issuers/issuersdirectory/companydetails/!ut/p/z1/04_Sj9CPykssy0xPLMnMz0vMAfIjo8zi_Tx8nD0MLIy83V1DjA0czVx8 nYP8PI0MDAz0I4EKzBEKDEJDLYEKjJ0DA11MjQzcTfXDCSkoyE7zBACSKhH/?companySymbol=1211 Sharfman, M. P., & Fernando, C. S. (2008). Environmental risk management and the cost of capital. Strategic Management Journal, 29(6), 569–592. SADAFCO Company 2019 2018 Notes Equity Information # of Shares Outstanding Total Dividends Dividend per share Growth g P0 D1 Re E (Market Value of Equity) Debt Information Interest Paid Current Liabilities Non-Current Liabilities Rd D (Book Value Debt) Value of the Firm (V) We Wd WACC 30 32,500,000 130,000,000 4 3.39% 157 4.14 6.03% 5,102,500,000 0 420,374 137,509 0% 557,883 5,103,057,883 99.9891% 0.0109% 6.03% 32,500,000 195,000,000 6 0 329,133 112,672 AFCO Company 2017 32,500,000 130,000,000 4 0 268,724 111,072 2016 32,500,000 113,750,000 3.50 0 196,498 100,422 2015 Notes 32,500,000 from Financial Statements 113,750,000 from Financial Statements 4 My Calculation My Calculation From Tadawul on 7 April 0 176073 from Financial Statements 83,768 from Financial Statements No outstanding bonds SADAFCO Co. Value of the firm (V) Equity information Year # of Shares Outstanding P0 growth g D1 Re E (Market Value of Equity) Debt Information Year # of bonds outstanding current liabilties non current Liablites Interent Payment D (Market Value of Debt) Pre-tax Rd WACC Year Weight of Equity Weight of Debt Pre-tax Rd Re WACC ADAFCO Co. SAR 5,103,057,883 E+D Equity information 2019 Notes 32,500,000 157 Closing price in 7th April 3.39% 4.14 6.03% Using divident growth modle # of shares outstanding*Price SAR 5,102,500,000 SAR Debt Information 2019 Notes no outstanding bonds SAR SAR no bonds 420,374 137,509 0 SAR no interest payment 557,883 0.00% YTM WACC 2019 Notes 0.9999 E/V 0.0001 D/V 0% 0.0603 6.02% Low WACC ALMARAI Co. Value of the firm (V) SAR 51,375,000,000 Equity information 2019 Year # of Shares Outstanding P0 1,000,000,000 SAR 49.50 Almarai Beta Market risk premuim Risk free rate Re 0.76 0.0424 0.0256 5.78% E (Market Value of Equity) SAR 49,500,000,000 Debt Information Year # of bonds outstanding Par value Price of 1 bond Nper Copoun Rate Interent Payment D (Market Value of Debt) Pre-tax Rd 2019 SAR SAR SAR 2,500 750,000 750,000 10 4.31% 16,163 1,875,000,000 2.16% SAR SAR WACC Year Weight of Equity Weight of Debt Pre-tax Rd Re WACC 2019 0.9635 0.0365 0.0216 0.0567 2.076% Notes Closing price in 7th April Using CAPM # of shares outstanding*Price Notes Financial statements At par 5 years semiannually C.R*Par Value Price*# of bonds YTM Notes E/V D/V Low WACC indicates Almarai raise capital chaeaply, Rd*(1-Tc) Tc=5% SADAFCO Company 2019 2018 Notes Equity Information # of Shares Outstanding Total Dividends P0 25 31 Rf Rm MRP Re (CAPM) E (Market Value of Equity) 84,700,000 236,909 26.45 1.060 2.56% 6.80% 4.24% 7.05% 2,240,315,000 Debt Information Interest Paid Current Debt Non-Current Liabilities Total Debt Rd D (Book Value Debt) Value of the Firm (V) 2019 75,362,830 589,738,177 1,260,337,354 1,850,075,531 4.44% 1,850,075,531 4,090,390,531 Beta We Wd WACC 28 0.5477 0.4523 5.77% 84,700,000 224,157 2018 AFCO Company 2017 84,700,000 2016 84,700,000 2015 Notes 84,700,000 from Financial Statements from Financial Statements Tadawul on 7 April https://www.investing.com/equities/natl-agr-dev http://www.market-risk-premia.com/sa.html http://www.market-risk-premia.com/sa.html 2017 2016 2015 Notes from Financial Statements from Financial Statements from Financial Statements My Calculation (Current Debt + Non Current) No outstanding bonds /equities/natl-agr-dev ...
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