What capital structure would you advise the firm to aim for, given its current situation? Should the firm adjust its current dividend policy? Justify your answer.

Analysis of the financial situation of the Aurubis Group

Subject: Corporate Finance

Part 1 (main Assessment Paper) (max 2800 words)

This assignment requires an analysis of the financial situation of the Aurubis Group, one of the leading copper producers worldwide. The parent company is Aurubis AG, based in Hamburg, Germany. Company information is available from https://www.aurubis.com/en/download-center/all. For the purpose of this assignment, treat the entire group as if it were a single entity.

Q1. Provide a brief characterisation of the company. Put more emphasis on the financial situation (such as components of cash flows and the stock price) relative to other aspects (such asstrategy or marketing), but do not ignore the latter. (12 marks)

Q2. Describe how the capital structure of the firm developed over time. What were the likely drivers of past capital structure changes? Could you identify a target capital structure and, if so, how? Check whether any of the main capital structure theories appear to apply to this firm. Justify your answer. Your analysis should cover the last ten years for which data is available. (30 marks)

Q3. What capital structure would you advise the firm to aim for, given its current situation? Should the firm adjust its current dividend policy? Justify your answer. (10 marks)

Q4. Calculate the cost of equity of Aurubis Group.Describe in detail what calculations you perform, what inputs you use and justify any assumptions you have to make. (20 marks)

Q5. Calculate the cost of debt of Aurubis Group. Describe in detail what calculations you perform, what inputs you use and justify any assumptions you have to make. (16 marks)

Q6. Briefly describe how you would calculate Aurubis’ weighted average cost of capital (WACC). No actual WACC calculation is required. (12 marks)

You may use information from any publicly available source. Please make sure that all the sources used are being properly referenced.

Part 2 (Excel File, tables, charts, graphs)

Microsoft Excel File needs to be submitted alongside the report. The company website at www.aurubis.com is quite informative, also w.r.t. financial information above and beyond the financial statements.

For Question 1:

requires data collection and condensed data presentation using graphs etc. cash flow

o dynamics of key figures such as revenues and cash costs, balance sheet total, working capital, capital expenditure
o other important aspects around cash flow
o risk in operating cash flow (business risk), other risks
market price of equity
o absolute performance
o performance relative to MDAX
o performance relative to peers of which there are not many
debt ratings, if any
a SWOT and/or PESTLE analysis
M&A activity if any

For Question 2:

in part descriptive, in part analytic description of capital structure over time

o market values for equity
o market values estimates for debt (less straightforward)
o net working capital to be used
o correction for excess cash holdings (if any)
analysis
o indications for trade-off theory (tax shield/tax rate/distance to default)
o indications for any other theory
o target capital structure might exist, but issues with identifying it

For Question 3:

recommendation of capital structure and payout policy in times of the COVID pandemic, the expected economic recovery and an acquisition answer will depend, among others, on most recent macro, industry and company figures aspects to be covered include rate of burning available cash, access to credit lines even in times of crisis, impact of vaccines on speed of economic recovery, speed and smoothness of integration of acquisition payout recommendation requires a some data collection/analysis of dividend policy so far recommendations depend on judgement about COVID impact in relation to how healthy the company’s business model is

For Question 4: requires a detailed cost of equity calculation cost of equity

o collect stock price and index data, calculate beta
o apply CAPM to obtain cost of equity estimate
o discuss alternatives and use them as a robustness check
o choice of right risk-free rate
excellent source: A. Damodaran (2012): Investment Valuation: Tools and Techniques for Determining the Value of Any Asset, 3rd edition, Elsevier

For Question 5:

requires a detailed cost of debt calculation interest-bearing debt correction if needed external rating agency’s rating or synthetic rating, to be derived from EBITDA/interest expense ratios or the like; credit spreads for similar ratings to be identified and applied effective tax rate calculation

Can the success of a special debt instrument (Schuldschein, with ESG rating), issued in 2020, be useful for the cost of debt?

For Question 6:

students should not actually calculate WACC; but just describe the steps needed
proportions of debt and equity, in market values (how, if possible), corrected for cash holdings
straightforward to answer.

All calculations need to be presented in Microsoft Excel Files.

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