Corporate Finance Future Expansion Plans

Question: Describe about the Corporate Finance for Future Expansion Plans. Answer: Introduction The present report aims to provide advice to Woolworths as a financial advisor for supporting its future expansion plans. In this context, the report demonstrates the current financial standing information of the company by analyzing its market value, share value and debt to profit ratio. It also describes the recent capital raising activity of the company through share equity financing or debt financing. In addition to this, the financial strategy is also analyzed to gain an understanding of the strategies used by the company to raise funds. At last, the report provides advice to the company for raising capital in order to fund its future expansion plans. Background of the company Woolworths Limited is an Australian company that is involved in retail business in the country offering food, petrol, liquor, home improvement and general merchandise products to the customers. The company is recognized as largest supermarket chain of the country and operates about 961 stores across the Australia. It is publicly listed on Australia Stock Exchange (ASX) since past 20 years. The company is believed to employ about 111,000 people in its retail stores, distribution centers, and support offices for providing customers high quality products conveniently. The company is recognized as Fresh Food People as it procures about 98% of fresh fruit and vegetable from Australian farmers and growers (Woolworths Supermarkets, 2012). Woolworths Current Financial Standing Position The current market capitalization of Woolworths is around 28.72B and it shares are worth around $ 19.87 (Raszkiewicz, 2015). The debt/equity ratio indicates the financial leverage of the company and is calculated by dividing the total liabilities by stockholders equity. The best/equity radio of Woolworths for the financial year 2015 is calculated as follows: Formula: Debt/Equity = 5331/10834 = 0.49 The ratio indicates the incorporation of more equity in comparison to debt in the capital structure of the company. This is a good sign for the company as it decreases the business risk and therefore supports its long-term growth and development. As indicated by debt/equity ratio, the company incorporates more the use of equity as compared to debt for financing its assets (Annual Report, 2015). Thus, it is analyzed from the market value, share value and debt to equity ration of Woolworths that its current financial position is stable but the company must take future measures for increasing the share prices as market value of shares are low as compared to the previous years. Capital Raising Activity of Woolworths The companys performance is declining in the recent years due to the huge investments made by it in sectors such as home improvements. This caused a shift in focus of the company from manufacturing its food products from fresh ingredients to other sectors causing a decrease in its profitability. The fund manager is currently planning to raise the capital through asset sales of its unprofitable home improvement business (Heffernan, 2016). The credit rating of the company is under risk with rapid decline in its supermarket sales in the past few financial years. The board of directors is cutting down the dividends paid to the shareholders by about 30 per cent and also reducing the payout ration from 70 per cent to about 50 per cent. This is done to retain cash and thus strengthen the balance sheet of the company for improving its credit rating (Mitchell, 2015). The company is also currently emphasizing on incorporating more debt in its capital structure for meet out its current liabilit ies (WOOLWORTHS HOLDINGS LIMITED 2015 INTEGRATED REPOR, 2015). Thus, it can be said that the company is preferably incorporating the use of equity and debt financing both for raising its capital structure. Woolworths financial strategy The financial strategy of the company includes appropriate capital structuring for enhancing the shareholder value. The company pays good dividends to shareholders through optimizing its weighted average cost of capital (Annual Report., 2015). The debt financing policy of the company includes creating an adequate match between long-term debt to long-term equity, minimizing re-financing results and hedging of interest rate for outweighing the potential risks from foreign currency exposure. The board of directors ensures the presence of certainty in liquidity position for meeting the challenges of occurrence of any global financial crisis. The companys incorporate the use of equity financing largely for maximizing shareholder value. It seek to provide highest dividend to shareholders through reducing its liabilities from debt financing (Managing Directors Report Capital Management and Outlook., 2012). Woolworths is also recently utilizing the use of its balance sheet for raising capita l as to reduce its dependence on debt financing. The company is reducing its payout ratio and re-selling its unprofitable assets for enhancing the equity proportion in the capital structure (Mitchell, 2015). However, the company is also currently planning to increase the debt proportion in its capital structure for meet its current liabilities (WOOLWORTHS HOLDINGS LIMITED 2015 INTEGRATED REPOR, 2015). Conclusion On the basis of the overall discussion held in the report, it can be concluded that current financial position of Woolworths is not sound as it is facing huge loss in its profitability owning to less market sales of its retail products ion home improvement category. The company, is recommend to emphasizes on its main business area, that is, manufacturing fresh food products by divesting its unprofitable businesses for regaining its market leader position in the retail sector of the country. It has invested largely in the manufacturing of products such as home improvement, petrol station, liquor that are not proving to be largely profitable for the company. The company can acquire funds through selling its non-profitable business units and therefore raise capital for supporting its future expansion plans of acquiring finance for production of its main business area of food products. The Company should also incorporate less debt in its capital structure as it would increase the future liabilities posing a threat for its sustainability. The company should focus largely on incorporation of equity financing for reducing the business risk of increasing liabilities. References Annual Report. 2015. [Online]. Available at: https://www.woolworthslimited.com.au/icms_docs/182381_Annual_Report_2015.pdf [Accessed on: 19 September 2016]. Managing Directors Report Capital Management and Outlook. 2012. [Online]. Available at: https://www.woolworthslimited.com.au/annualreport/2012/md-capital-management-outlook.html [Accessed on: 19 September 2016]. Mitchell, S. 2015. Woolworths dividend, credit rating at risk. [Online]. Available at: https://www.smh.com.au/business/retail/woolworths-dividend-credit-rating-at-risk-20151103-gkq2lr.html [Accessed on: 19 September 2016]. Heffernan, M. 2016. Capital raising, store closures may be in store for Woolies. [Online]. Available at: https://www.smh.com.au/business/retail/capital-raising-store-closures-may-be-in-store-for-woolies-20160722-gqbiae.html [Accessed on: 19 September 2016]. Raszkiewicz, O. 2015. How much are Woolworths Limited shares REALLY worth? . [Online]. Available at: https://www.fool.com.au/2015/06/12/how-much-are-woolworths-limited-shares-really-worth/ [Accessed on: 19 September 2016]. WOOLWORTHS HOLDINGS LIMITED 2015 INTEGRATED REPORT. 2015. [Online]. Available at: https://www.woolworthsholdings.co.za/investor/annual_reports/ar2015/whl_2015_integrated_report.pdf [Accessed on: 19 September 2016]. Woolworths Supermarkets. 2012. [Online]. Available at: https://www.woolworthslimited.com.au/page/Who_We_Are/Our_Brands/Supermarkets/Woolworths/ [Accessed on: 19 September 2016].