Capital Structure Of Coca Cola Assessment Answer

Answer:

Introduction:

Financial management is a very effective and efficient way to manage the operations of the comapny and assists organization to achiever the objectives of the company. Financial management is associated with the top level management of the company. Capital structure is also a part of financial management of an organization. Capital structure is the combination of various sources which has helped the company to raise the funds. Capital structure is a way through which an organization fiancés it resources through debt, equity and hybrid securities. Capital structure of an organization explains about the total capital of the organization as well as it briefs that how are the position of the company in terms of risk and how much cost are bear by the company for the total capital.

In the report, capital structure of Coca cola Amatil has been discussed. For calculating and identifying the total capital of an organization, WACC of the company has been calculated as well as the study has been done on the gearing ratio of the company in this report to identify the performance of the company. Few suggestions have also been given to the company.

Coca Cola Amatil:

Coca cola Amatil is an Australian company which is operating its business is non alcoholic beverages industry. The company has been awarded as largest company in the non alcoholic beverages industry. The company is the subsidiary company of Coca cola. It is an international company which is running its business in 5 more countries except the Australia which are New Zealand, Fiji, Samoa and Papua New Guinea and Indonesia. Company has diversified the product line a lot to capture and grab the entire market. The current products of the company are Coca cola, Fanta, sprite, canned tomatoes, mother, Sprite zero, spreads, Coca cola zero, diet coke etc. (Home, 2018). Currently, the company is following the strategy of diversification and the corporate social responsibilities of the company are also better. The annual report of the company expresses that the financial performance of the company has been better.

Currently, the total turnover of the company is $ 4881 million which has been increased from last year. The annual reports of the organization brief the changes into the capital structure of the organization in current year from last year. Annual report (2017) explains about14700 people who are employed by the company to manage the operations and the performance of the company. In the report, capital structure of the company has been identified on the basis of WACC and gearing ratios.

WACC:

WACC is a tool to recognize the total cost of capital which would be bear by an organization against the total capital amount. WACC briefs about the total cost expenses of an organization. This tool deals with all the capital related factors of an organization to identify the total cost f an organization. WACC techniques explain that firstly the cost of each individual source must be calculated along with the total portion of that share in the total capital of the organization. In addition, the fraction must be multiplied by the total cost of that source and hence, the total amount is the total WACC of an organization.

In the case of Coca cola, it has been found that the main sources of capital of the company are debt and the equity only. For calculating the WACC of the company total debt and total equity amount has been identified first. Annual report (2017) explains that the total debt of the company is $ 1930 and the total equity amount of the company is $ 1549 on the basis of annual report and $ 7,111 on the basis of market value (yahoo finance). It explains that the fraction of debt amount is 21% and the equity amount is 79% in total market capital of the company.

For calculating the cost of capital amount of the company cost of debt has been calculated firstly and it has been found that the total interest rate of the company on long term debt is 7.5% and the tax rate of the country is 30% (Reuters, 2018). Thus the total cost of debt of the company is 5.25%.

Calculation of cost of debt
Outstanding debt	1,930
interest rate	7.50%
Tax rate	30.0%
Kd	5.25%

Further, cost of equity of the organization has been calculated. Cost of equity explains about the total expected amount of investors from the company. Cost of equity of coca cola Amatil has been calculated on the basis of CAPM technique. CAPM techniques require the risk free rate (minimum return rate of the market without any risk), market risk premium and beta (stock volatility) of an organization.

In case of Coca cola Amatil, it has been found that the risk free rate of the company is 2.41%. The risk free rate of the company has been chosen on the basis of 5 year Treasury bond yields. Further, the market risk premium of the company is 7% which has been chosen from the range of 6% to 8% (given in the case). And lastly, the beta amount has been calculated on the basis of historical stock price of coca cola Amatil and AORD index. The beta of the company is 0.721 (Yahoo finance, 2018). It leads to a conclusion that the cost of equity of the company is 5.72%.

Calculation of cost of equity (CAPM)
RF	2.41%
RM	7.00%
Beta	0.721
Cost of equity	5.72%

 
On the basis of cost of debt and cost of equity, it has been calculated that the total WACC of coca cola Amatil is 5.62%.

WACC calculations of Coca Cola Amatil (Market Value)
(Amount in millions)
	Price	Cost	Weight	WACC
Debt	1,930	5.25%	0.21	1.12%
Equity	7,111	5.72%	0.79	4.50%
	9,041	Kd		5.62%

(Yahoo finance, 2018)

Explanation and Judgment:

In the above calculations, the total WACC of the company is 5.62% which has been calculated on the basis of cost of debt and cost of equity of an organization, the calculations have already been explained in the above part. However, on the basis of calculations, it has been found that the total cost of debt amount of the company is 5.25% and the fraction of the debt is 0.21. On the other hand the cost of equity of organization is 5.72% and the total fraction of equity amount is 5.72% (Annual report, 2018).  It explains that the weighted cost of debt and weighted cost of equity of the company is 1.12% and 4.5%.

It explains that the cost of debt of the company is lower and so the portion of debt amount in capital. It leads to a conclusion that company is required to enhance the level of debt amount to manage the performance and reduce the total cost of capital of the company.

Gearing ratios and difficulties:

Gearing ratio is a financial calculation which explains about the relationship among the total debt and the total capital of an organization. It is a toll to identify the total risk of an organization. This tool explains about the relationship among both the factors and offers a base to top level management of the company to make a decision about the optimal capital structure and the risk level of the organization. Gearing ratio makes it easy for the external stakeholders of the organization to make a decision about the company as well. Simultaneously, the gearing ratio calculations are done by the companies to measure the capital structure position of an organization.

In case of coca cola Amatil, it has been found that the total long term liabilities of the organization are $ 2338 and the total current liabilities of the company are $ 1839. On the other hand, the total assets of the organization are $ 6057. It explains that the capital employed of the company is $ 4218 ($ 2057- $ 1839). It leads to a conclusion that the gearing ratio of the company is 55.43%. It explains that the total long term liabilities of the company are 55.43% of total capital of an organization.

Gearing ratio= Long term Liabilities/ capital employed
Capital Employed = Total assets- current liabilities
Calculation of Gearing ratio
Long term liabilities	2338
Current liabilities	1839
Total assets	6057	4218
Gearing Ratio	55.43%

(Morningstar, 2018)

In calculation of gearing ratios, no problem has been found. As the calculations are quite simple, the formula has been found in books and the data of financial items of the company was easily availed at annual report (2017) of the company.

Findings:

On the basis of the above study, it has been found that the total cost of capital of the company is 5.62% which is the combination of cost of debt and cost of equity of the company. On the basis of calculations, it has been found that the total cost of debt amount of the company is 5.25% and the fraction of the debt is 0.21. On the other hand the cost of equity of organization is 5.72% and the total fraction of equity amount is 5.72%.  It explains that the weighted cost of debt and weighted cost of equity of the company is 1.12% and 4.5%. The entire data for calculating the cost of debt and cost of equity of an organization has been calculated on the basis of historical data, annual report and the Bloomberg (2018).

Further, the risk position of the company has also been evaluated and it has been found that the gearing ratio of the company is 55.43%. It explains that the total long term liabilities of the company are 55.43% of total capital of an organization. It is an optimal capital structure position of an organization. The risk level of the company is balanced in current scenario.

Recommendation:

To recommend, the capital structure performance, cost and risk, all actors are in the favour of the organization. The cost of capital of the company is competitive as well as the risk level of the company is balanced. However, it has been recognized that the cost of debt of the company is lower and so the portion of debt amount in capital. It leads to a conclusion that company is required to enhance the level of debt amount to manage the performance and reduce the total cost of capital of the company. The company could raise the fraction of total debt amount to 55% to manage the cost and the performance of the capital structure in the organization. However, the current performance of the company is also better.

Reflection:

The report was quite interesting to undertake. Study on a real company is quite interesting as you can evaluate lot of the figures to make decision about the company. In the report, I have used the market data of equity rather than book value of equity to measure the WACC. The market value has been calculated on the basis of market stock price and the total outstanding shares of the company. However, there was no much difference among the cost of capital on the basis of book value and the market value.

Further, the risk free rate of the company is 2.41%. The risk free rate of the company has been chosen on the basis of 5 year Treasury bond yields as the historical data of the company were also of 5 years. The different risk free rate directly impacts on the cost of equity.  Further, the market risk premium of the company is 7% which has been chosen from the range of 6% to 8% (given in the case). And lastly, the beta amount has been calculated on the basis of historical stock price of coca cola Amatil and AORD index. The beta of the company is 0.721. The total interest rate of the company on long term debt is 7.5% which has been evaluated from its annual report and the tax rate of the country is 30%.

In short, the study was quite interesting. It has helped me a lot to understand about the market, capital structure position of an organization and the cost and risk factor of the capital structure.

References:

Annual report. (2017). Coca cola Amatil. (Online). Retrieved on 14 May 2018 from: https://www.ccamatil.com/-/media/Cca/Corporate/Files/Annual-Reports/2018/Annual-Report-2017.ashx.

Bloomberg. (2018). Australian bonds and rates. (Online). Retrieved on 14 May 2018 from: https://www.bloomberg.com/markets/rates-bonds/government-bonds/australia.

Home. (2018). Coca cola Amatil. (Online). Retrieved on 14 May 2018 from: https://www.ccamatil.com/.

Morningstar. (2018). Coca cola Amatil. (Online). Retrieved on 14 May 2018 from: https://financials.morningstar.com/income-statement/is.html?t=CCL&region=aus.

Reuters. (2018). Coca cola Amatil. (Online). Retrieved on 14 May 2018 from: https://www.reuters.com/finance/stocks/overview/CCL.AX.

Yahoo Finance. (2018). Coca cola Amatil. (Online). Retrieved on 14 May 2018 from: https://finance.yahoo.com/quote/CCL.AX?ltr=1.