Financial Accounting

Financial Accounting

Assignment 1

1. A company’s capital structure encompasses ways the organization finances its operations and development with diverse sources of funds. For instance, long term notes payable, preferred stock, common stock, or retained earnings. Mostly, the capital structure is known as financial leverage. It helps in the control of a larger amount of borrowed amount which results in the owner’s cash investment being improved. Thus, it exists in different types such as equity capital, debt capital, vendor financing, and public holder float financing.

The equity capital is known as the funds owned by either the owners or the shareholders. It represents the cash contributed by both the owners, investors, and companies reinvested profits. It consists of two main categories which are retained earnings and contributed capital. The retained earnings are known to be part of the profits that the organization has kept in its business (Brav, 2009). It is kept separately by the organization and helps in strengthening the business. On the other side, the contribution capital represents the amount of cash that the organization owners have invested at the time of opening the company. Also, it can include the amount of money that the company receives from the shareholders as a price for ownership of the company.

In addition to that, the equity capital is viewed as a very expensive means to use. Its costs and the size of the return required to be earned to attract the investors is high. An example of equity capital is the common stock capital. In this case, the company issues the share of common stock in exchange for money (Nobes, 2015). Thus, every share takes an ownership position in the company. In a circumstance where three individuals take $ 50, 000 to begin a corporation. At the end of it, each member can get an equal number of shares of common stock.

The debt capital in a company’s capital structure is known as the borrowed cash at work in the business. It exists in two forms which are the long term bonds and sort term commercial paper. The long term bonds are well-thought-out as the safest of the debt. It has an extended payment period where the interest is the only thing that needs to be repaid and the principal is paid at maturity (Harvey & Lusch, 1999). For the short term commercial paper is known to be a short term debt instrument. In companies, it is used to make capital for a short time. Thus, the debt capital is deliberated as the cheapest since its interest expenditures on the debt are a tax-deductible expense. Examples of debt capital include bank loans, card debt, and personal loans.

Vendor financing is another type of less know form of capital structure. It occurs when a company can sell goods before paying their vendor. Mostly, the vendor financing contracts have high-interest rates compared to the imposed traditional leading institutions. Therefore, it enables the building of a strong relationship between the business owners and the vendors. An example of vendor financing is taking a look at a manufacturing company of two companies. Company A wants to procure raw materials from company B with a worth of 10 million. For company, A payment is at 4 million to company B which is due to its liquidity crunch. Company B agrees with giving raw materials of 10 million after taking the 4 million. Therefore, for the remaining 6 million outstanding amount the company B charges the company a nominal rate of 10% for a particular time. From there, company A can procure raw materials worth 10 million by paying 4 million upfront. Thus, the remaining 6 million are put in installment for 10% of the interest rate. Generally, vendor financing permits the business owners to purchase the needed goods and services without an approach to the financial institution for funds.

2. The company’s capital structure is influenced by diverse varieties of factors. Some stability of sales enhances the company’s ability to pay interest on debentures. In circumstances where the sales are rising the organization uses more of debt capital. Although, when these sales are unstable it is not advisable to employ additional debt capital. Another factor is the type of investors where the capital structure is affected by the likings of potential investors. Thus, according to the requirement of prospective investors, diverse securities types are given. In addition to that, the legal requirement influences the capital structure of a company. For example, all the banking companies are not allowed by the Banking Regulation Act to give any kind of securities except for the equity shares. Also, the market condition is among the factors that affect the company’s capital structure. The prevailing conditions in the capital market give a determination of the type of securities to be issued. For instance, during low activity periods, the preference and debentures shares are easily marketed since they carry a fixed return rate.
3. The relationship between capital structure and companies’ performance occurs in variety of forms. It exists in the interactive relationship and capital structure, development ability, board, equity concentration. Also, the companies scale which is important for the influence of the corporation performance (Porter, 1979). Therefore, the profitability, development ability, collateral value of assets, debt paying ability and the enterprise scale which influences the capital structure. As a result, the common elements found in both the capital structure and the companies’ performance display their relationship.

Assignment 2

1. The first company is known as MISC Berhad (MYX: 3816) which is Bursa Malaysia based. It was created in 1968 where it was known as the Malaysia International Shipping corporation. As a result, it becomes the leading international shipping line in Malaysia. In 2005, the corporation changed its identity to MISC Berhad. The company has two main shareholders who are the Petroleum Nasional Berhad and the national oil conglomerate of Malaysia. Also, this corporation has a variety of principal business. Some of them are Ship owning, Marine repair, Construction and Engineering activities, Ship Operation among others. The company has mainly specialized in energy transportation. In addition to that, it loads both chemical products and vegetable oils where it has trading routes. They include South East Asia, the Middle East, the Far East, the Americas, and the Indian Subcontinent. Its offshore business involved the company is offering its consumers complete scope of the offshore floating facility services. However, in November 2011 the MISC company announced an exit from its liner business which included container shipping (Bari & Syazwani, 2019). The reason behind this was due to the radical alteration in the operating dynamics of the liner business. Also, these liner business industries were driven by greater operating costs and fast alterations in global trade designs. As a result, the company had challenge invalidity of the recent operating model. The decision made has affected the company in a way that it has made a financial loss of US$789 million over the past three years (Jusoh, 2010). The MISC Berhad financial highlights include its price bid at 7.870 to 7.950, volume at 2, 399, 800, return on equity is at -0.70, and earnings per share are at -5.40. Also, the price-earnings ratio is at -146 with a percentage price change of – 0.37 and its dividend yield is at 3.81.

The second public company in Bursa Malaysia is known as Nestle (Malaysia) Berhad. In 1912, these investments holding company was established where its first office was set up in Bishop Street, Penang. Due to the development and expansion in 1933 the Nestle company expanded to Kuala Lumpur. Therefore, the very first Nestle factory in Malaysia was set in the year 1962 in a place known as Petaling Jaya (Chow, 2017). In the recent world, the company produces its products from mainly seven factories which are Chembong found at Negeri Sembilan, Shah Alam and Petaling Jaya found at Selangor, and Kuching found at Sarawak.  Generally, the company is known to be wellness, nutrition, and health organization. As a result, the company has diverse segments where the main one is Food and Beverage. Its subsidiaries consist of the Nestle Product Berhad which is involved in the sale and marketing of drinks, ice-cream, juices, and many more. Also, the Manufacturing (Malaysia) Berhad manufactures and sells cereals, yogurt, coffee, powdered milk, juices, and many more. Lastly, the Nestle (Malaysia) Berhad which produces and sales confection products and chocolates.

The Nestle company is known to be a large-sized organization. As a result, it employs more than 5, 000 individuals, and producers. Its employees consist mostly of the local individuals since they have a greater understanding of both the culture and taste of the indigenous market compared to the outsiders (Shelley, 2015).  Also, it markets a greater number of Halai products in Malaysia which range from 300 to 500. The financial highlights of the Nestle company include sales at RM5.52 million, price bid at 139.200 to 141.000, volume at 48, 400, return on equity is at 72.70, and earnings per share is at 288.10. Also, the price-earnings ratio is at 53 and its market cap is at 33, 064.5M.

2. The companies’ capital structure encompasses the specific combination of its used debt and equity to finance the overall operations and development. Therefore, the disclosure if the companies’ capital structure is important for all entities. It enables the entities to describe their view of the elements of capital in cases where it is diverse from the equity. In 2019, the MISC Berhad total share capital was at RM 8, 923, 262,000 with a treasury share of (271), another reserve of 3, 832, 478,000 and retained profits of 11, 165,769,000. As a result, the equity adds up to 23, 921, 238, 000. Some of the shares or debenture in a variety of subsidiary are shown in the following tables;

No of ordinary shares

Number of stapled securities

Number of ordinary shares

Number of ordinary shares

On the other side, for the ordinary share capital given to the Nestle company is 2, 976, 000, 000. However, in 2019, the shares are reduced to CFH 298 million. The nominal registered shares of 100 million are at a nominal value of CHF 0.10 each.  As a result, the company’s board of directors allows the finance of the company’s activities with the use of the convertible debenture. The tables below clearly show some of the shares;

Treasury Shares

No of shares outstanding

3. The company’s capital structure has an important value for the organization. It enables one to evaluate his or her business since it has a blend of debt financing and equity. Therefore, the MISC group performance in 2019 is seen to be solid whereby there has been good progress on the strategic initiative and long-term agenda. The company has recorded higher revenue of RM8,962.7 million and hence a healthy balance sheet. For the capital structure in MISC Berhad company is less aggressive. As a result, the company poses a lesser risk of investors. Thus, the company shows a higher performance since the investments gained are less than average. Nestle Berhad company capital structure is more aggressive. As a result, the Nestle company has a higher risk of investment which leads to its underperformance due to the greater than average. The investment opportunities in this company result in investors having potential higher returns.
4. In conclusion, a company’s capital structure consists of ways the organization finances its operations and development with different sources of funds. The capital structure exists in different types which mostly are equity capital, debt capital, and vendor financing. Thus, this capital structure is influenced by different factors which include the stability of sales, legal requirements, and capital market conditions. For the two public companies in Bursa Malaysia which are MISC Berhad and Nestle Berhad. The MISC Berhad displays a better performance compared to the Nestle Berhad company. Therefore, in 2019 MISC Berhad attains more profit.

Reference

Bari, A., & Syazwani, N. A. (2019). Tobin’s Q and Its Determinants: A Study of Market Valuation in MISC Berhad.

Brav, O. (2009). Access to capital, capital structure, and the funding of the firm. The Journal of Finance, 64(1), 263-308.

Chow, V. (2017). THE RELATIONSHIP BETWEEN RISK AND PERFORMANCE OF NESTLÉ (MALAYSIA) BERHAD.

Harvey, M. G., & Lusch, R. F. (1999). Balancing intellectual capital books: intangible liabilities. European management journal, 17(1), 85-92.

Jusoh, M. Q. (2010). Analysis of the company’s performance: financial ratio analysis and index trend analysis: the case of Malaysian International Shipping Corporation (MISC) Berhad.

Nobes, C. (2015). Accounting for capital: the evolution of an idea. Accounting and Business Research, 45(4), 413-441.

Porter, M. E. (1979). The structure within industries and companies’ performance. The review of economics and statistics, 214-227.

Shelley, S. Z. (2015). Internship report on Nestlé Bangladesh Ltd