Kappa Pro Plc Development Decision Analytical Essay by Nicky

Kappa Pro Plc Development Decision
Uses corporate finance management tools to decide the best action to be taken by Kappa Pro Plc to sustain the future development of the organization.
# 150208 | 2,355 words | 15 sources | APA | 2012 | US
Published on Jan 29, 2012 in Business (Accounting) , Business (Management) , Accounting (Managerial)


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Description:

This paper explains that the managerial team at Kappa Pro Plc has two viable alternatives to expand the company internally by financing either through debt or equity or to grow externally through the takeover of Militin Bros SA. To make the most best decision, the author analyzes several technical accounting and market features of these available alternatives. The paper recommends the selection of the second alternative of external expansion through the acquisition of Militin Bros using debt as the main payment method. Formulas, calculations and figures are included in the paper.

Table of Contents:
The Problem
Raising Funds through Debt - Impact on Shareholders
Debt's Impact on Key Profitability Ratios
Debt to Equity and Weighted Average Cost of Capital
Modigliani and Miller's Propositions
Affordable Dividend per Share under a Residual Dividend Policy
Stopping Dividend Payments
Pros and Cons of Mitilin Bros Takeover
Relative P/E
Maximum Offer Price
Cash vs. Stock
Bid's Impact on Share Price

From the Paper:

"Nobel Prize laureates Franco Modigliani and Merton Miller are two of the most notable contributors to the fields of finance and their crucial contribution has been brought by the introduction of two new propositions relative to capital structure. The first proposition states that, in the case where the firm does not pay taxes, its cash flows are independent from leverage. In the words of the economists, "assuming that there are no taxes paid, the value of a firm is independent of its capital structure." The diagram below reveals this proposition:
"The second of Modigliani and Miller's propositions sees that, when a company pays taxes, it is desirable for it to increase its debt and as such increase the value of its organization. "If taxes are taken into consideration, then a firm's capital structure with 100 percent debt is optimal." Relative to the situation at Kappa Pro Plc, under the first proposition, the company is to pay no taxes and its capital structure would be based on both equity and debt, in the proportion desired and established by internal features. If on the other hand, as it is in fact the case, the company pays taxes, it is desirable for us to finance our project through debt, rather than equity, as this would create the most value.

Sample of Sources Used:

  • Calamos, N., 2003, Convertible Arbitrage: Insights and Techniques for Successful Hedging, John Wiley and Sons, ISBN 0471423610
  • Damodaran, A., 2002, Investment Valuation: Tools and Techniques for Determining the Value of Any Asset, 2nd Edition, John Wiley and Sons, ISBN 0471414905
  • Evatt, B., Adopt an Optimal Capital Structure to Improve Shareholder Value, Burleigh Evatt, Retrieved from http://www.burleighevatt.co.nz/Document.aspx?Doc...pdf on September 9, 2009
  • Fabozzi, F.J., Peterson, P.P., 2003, Financial Management and Analysis, 2nd Edition, John Wiley and Sons, ISBN 0471234842
  • Kazmi, Strategic Management and Business Policy, Tata McGraw-Hill, ISBN 0070263620

Cite this Analytical Essay:

APA Format

Kappa Pro Plc Development Decision (2012, January 29) Retrieved May 22, 2013, from http://www.academon.com/analytical-essay/kappa-pro-plc-development-decision-150208/

MLA Format

"Kappa Pro Plc Development Decision" 29 January 2012. Web. 22 May. 2013. <http://www.academon.com/analytical-essay/kappa-pro-plc-development-decision-150208/>

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