1. CAPITAL STRUCTURE OF
A COMPANY
CASE STUDY AT SC SADELLI PRODCOM SRL
AUTHOR:
LUP PAULA MARIA
2. THE CAPITAL STRUCTURE
“Neither a borrower nor a lender be!”
(Polonius, Hamlet)
Capital can be collected by using two sources debt and equity, when a
business establishes its capital structure arises the problem of how much
should be debt and how much should be equity, each manager targets to get at
an optimal capital structure which is hard to be achieved.
3. Is there an optimal mix of
debt and equity?
If yes, what determines
an optimal mix?
And what are the costs and benefits of using debt
instead of equity?
4. Is there an optimal mix of debt and
equity?
An optimal capital structure is one that maximizes the
firm value.
An optimal mix of debt and equity=debt-equity ratio
constant.
5. What determines an optimal capital
structure?
EXTERNAL FACTORS
Inflation
Flotation cost
Market conditions
Lender's attitude
Legal framework
INTERNAL FACTORS
Tangibility
Control
Profitability
Liquidity
Company size
Growth opportunities
Flexibility of the company
Effective tax rate
6. What are the costs of capital structure?
The company’s cost of capital represents the cost that a company gives
up as a consequence of using sources of capital to finance its
investments which includes debt and equity.
The cost of capital is the cost of each component weighted by its
relative market value and we have the following formula to compute
weighted average cost of capital (WACC):
WACC = E/V Re + D/V Rd (1 - Tc)
7. ESTIMATING COST OF
EQUITY
The cost of equity is the expected return on company’s shares a company pays to
its investors for assuming some risk.
When we talk about listed companies we can use to estimate the cost of equity the
expected return on the company’s shares, capital asset pricing model (CAPM)
and dividend discount model (DDM).
8. ESTIMATING COST OF
DEBT
Debt financing=borrowing.
Attractive because of the interest paid which is tax deductible
Too much debt increases the risk of the company and makes it
unattractive to investors.
Cost of debt =the interest rate paid by a company for its debts
It can also be computed by dividing the annual interest payment of the
debt to its market value.
9. THEORIES CONCERNING CAPITAL
STRUCTURE
MODELS BASED ON
AGENCY COST
• Harris and Raviv (1990s)
• Stulz(1990)
• Jensen(1990)
• Jensen and
Meckling(1976)
• Williamson(1988)
• Diamond(1989)
• Hirshleifer and
Thakor(1989)
• Myers(1977)
• Green(1984)
MODELS BASED ON
ASYMMETRIC
INFORMATION
• Myers and Majluf(1984)
• Myers(1984)
• Brennan and Kraus,
Constantinides and
Grundy, Noe
• Ross(1977)
MODELS BASED ON
PRODUCT/INPUT
MARKET INTERACTIONS
• Brander and
Lewis(1986)
• Maksimovic(1988)
10. CASE STUDY AT SC SADELLI
PRODCOM SRL
OVERVIEW
Active in the agricultural sector, involved especially in primary
agricultural production.
1995 started its activity
2000 -opened the first store of plant protection products, their
number increased, such that now there are 5 stores
- started to sell on credit to small producers
2002 and 2003 purchased two agricultural cooperatives
2007 purchased some equipment through the implementation of
projects financed with European funds.
In 2008 was purchased BETA Company
11. SWOT ANALYSIS
STRENGHTS
Strong market position
Strong performance in cereals
High quality land
New technology
Financial resources are available
WEEKNESSES
Poor image marketing
Lack of reliable data and information on
organic agriculture
High cost of production
Extension system oriented towards
accessible farmers
OPPORTUNITIES
Strategic acquisitions
The development of new technologies
Governmental and EU support in policy
programs for agriculture
The increasing industries that are
related to agriculture
THREATS
Economic changes
Production risk
Legal and regulatory changes
Changes in what current competitors
offer
Entry of new competitors into
marketplace
15. CONCLUSION AND SUGGESTIONS
CONCLUSION:
Most of the indicators are at good levels => a good management.
Under expectation results: high level of leverage ratios => the company might not
have sufficient liquidity to meet its debt obligation.
The overall results proved that SC SADELLI PRODCOM has a good mix of capital, the
company following an uptrend with a substantial increase in the net profit.
SUGGESTIONS:
To list the company at BVB.
To improve its marketing strategy and advertise its products at a national level.
To stop increasing the level of debt financing => could bring the company to
bankruptcy.
Take advantage of the numerous European funds.
