Question:
This individual case study is an attempt to analyze long-term financial planning and related decisions of domestic and international companies
This case study is related to Unit-1 contents. You are required to choose two companies-one from Dubai Financial Markets (DFM) or Abu Dhabi Securities Markets (ADSM) and second from New York Stock Exchange (NYSE).
Make sure that you choose both companies from the same industry/sector. You need to analyze both companies capital structure and dividend policy related decisions and critically comment if you observe significant differences at domestic and international level. You may attempt the following points:-
- What type of financing these two companies have chosen-short-term or long-term? And why? Comment if companies financing pattern is in line with the industry. What securities companies have issued to acquire funds?
- What is the status of the companies’ optimal debt-equity ratio? Explain at what debt ratio the cost of capital is minimized and the company’s value is maximized.
- Assess whether companies have high free cash flows. What type of projects/investments companies have taken in the recent past? How responsive are managers to stockholders?
- Have these companies ever paid out dividends? If yes, evaluate the pattern of the dividends over time. Given the companies characteristics today, do you think that the companies should be paying more dividends, less dividends or no dividends at all?
- Do you think that the companies use their capital and dividends policies as signal to convey information to financial markets?
Solution:
Background of Selected Companies
The selected companies in this case study include the National Industries Group Holding which is listed under the Dubai Financial Markets (DFM) and the General Motors company which is listed in the New York Stock Exchange (NYSE). According to Arabian Business (2018), the National Industries Group Holding company (NIG) operate as a global digital industrial company and operating in the oil, gas, petrochemicals, heavy industries, infrastructure and privatization programs in the generation of power and public utilities. For the General Electric Company (GE), it operated in the same global digital industrial sector and involved in power generation, oil and gas production, financing and other industrial products (Reuters, 2018). Through the use of the two companies, an analysis of their capital structure and dividend policy related decisions and identify any significant differences at the domestic and international levels.
Financing of the two Companies
The two companies have chosen the use of long-term financing. The underlying reason for this trend is informed by the fact that their investments are long-term and expected to bear profits or returns on profit after a long period. Also, as noted by Kay (2012), firms often match their maturity of assets and liabilities and hence often adopt the use of long-term debt for making long-term investments including purchases of fixed assets of equipment. For instance, for NIG, it had taken a Sukuk Islamic Bond that was worth $475m (Arabian Business, 2012). From this bond, the company was in a position of refinancing their debt upon the rise of their borrowing costs and the offloading assets at deflated values in a stagnant private equity market is a significant challenge. Similarly, for the General Electric company, their Debt is caped at US112.48B (Yahoo, 2018). The smaller equity of the company as compared to the overall debt levels is an indicator of high leverage due to tax deductibility of interest payments. The GE company uses its financial wealth as security of securing wealth which is identified as an unconditional guarantee. Similarly, the NIG adopts the use guarantee and their assets as a security for their loans. This is a common practice of sourcing finances in the global digital industrial sector as they are al interested in using the long-term debt for the acquisition of immediate capital. This is particularly the case since the organisations debt-to-equity ratio is significantly manageable.
Companies Optimal Debt-Equity Ratio
In 2017, the NIG Debt to Equity ration was 2.37. This is as opposed to GE debt-equity ratio which was standing at 1.48 during the same period. According to El Ghoul et al. (2011), the cost of capital is the minimum rate of return that a business needs to earn prior value generation. The cost of capital is hence inclusive of the cost of debt and cost of equity used for financing their operations. This means that an increased debt rate has a direct implication in strengthening the financial risk to the shareholders and the return on the equity that they require. Hence, it is instrumental for companies to identify the point in which their marginal benefit of the debt equals to the marginal cost. In such a debt ratio, the cost of capital is minimized. For the GE, the debt to equity ratio that minimizes the cost of capital range from 1.73 to a maximum of 4.99. Additionally, within this range, the company is equally able to maximize their value. This…………………………………………………………………………………………………………………………………...Please contact our team to receive this assessment in its entirety based on your organisation of choice and level of expectations
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