Faisal - finance Essay Example | Topics and Well Written Essays - 3250 words

Faisal - finance - Essay Example Therefore, the most appropriate financial theory that is applicable to the company is the trade-off theory. The company is trying to balance cost and benefits associated with both equity and debt. Source of capital in the company is equity, bonds, bank loans and finance leases among other financial liabilities. Each of the above sources of capital has both advantages and disadvantages. It is possible to compute value of the company by calculating weighted average cost of capital (WACC) and shareholder value. WACC refers to an average rate of interest at which a company is expected to pay all its providers of capital. The seven drivers of shareholder value are growth in sales, operating profit margins, tax rate, working capital growth, fixed capital growth, cost of capital and the period of competitive advantage. The total value as estimated by the shareholder value drivers of the company was â‚ ¬16603.7 million in 2019. When the shareholders drivers are increased by 5 percent the company value of the company will increase to â‚ ¬21,443.61 million. The disadvantages of shareholder value analysis include difficulty in computations, difficulty in implementation, failure to include social needs and possibility of making errors in calculation of shareholder value analysis. ... Capital structure According to Taylor and Sansone (2007), capital structure is determined by the composition of target collateral pool, investment flexibility, condition existing in the market for the collateral, weighted average cost debt capital and the desired ratings of the bonds in the capital structure. Capital structure can be analysed by comparing company’s debts and equity used to purchase company’s assets. The capital structure of TUI AG is defined by shareholders funds, various categories of corporate bonds, finance lease as well as bank loans. To understand the theory behind the capital structure, it is important to explain the various sources of finance and the impact on the company. Leverage ratio of TUI AG is 62 percent (figure 3: in the appendixes). This indicates that 62 percent of the total assets were funded through debt. Table 3- Sources and Amount of capital of TUI AG for 2010 Source of capital Amount in million â‚ ¬ Equity 2434.2 Bonds 3038.3 Ba nk loans 1001.5 Finance leases and other financial liabilities 472.1 Source: TUI AG 20104; CIA 2011; TUI AG (20106) Finance theory There are a number of theories that have been used to discuss capital structure in companies. There are Modigliani-Miller theorem of capital structure (capital structure irrelevance), the pecking Order Theory and Trade-off theory of Capital Structure. Modigliani-Miller theorem of capital structure states that in absence of bankruptcy, transaction costs and taxes in an efficient market and asymmetric information, the value of the company is not affected by how it is financed. This theory is not applicable at this time because there are taxes. There are tax benefits because the value of the firm is decided after tax has been deducted. Table 1;