1. ASSESSMENT OF CAPITAL STRUCTURE OF
HUTCHISON WHAMPOA BASED ON
FUTURE FINANCING NEEDS
BY:-
TANIA ROY – 423
NITIN MEHROTRA – 425
TANMAY MEHTA –527
UTKARSH VASHISHTA – 528
SAHIL VOHRA - 530

2. WHAT IS CAPITAL STRUCTURE?
 The term `capital structure' represents the total
long-term investment in a business firm
 Includes funds raised through
 ordinary and preference shares
 bonds
 debentures
 loans from financial institutions
 Any earned revenue and capital surpluses are
also included in the structure

3. CAPITAL STRUCTURE CONSTITUTES OF
CAPITAL
STRUCTURE
DEBTS EQUITY
ORDINARY & RETAINED
BONDS DEBENTURES PREFERENCE EARNINGS
SHARES

4. CAPITAL STRUCTURE FOR AN ORGANISATION
 Optimum capital structure should be planned in a manner that
ensures that the market value of its shares is maximum
 A number of factors influences the capital structure decision of a
company and significant variations among industries and among'
different companies
 The judgment of the person or group of persons making the
capital structure decision plays a crucial role
 These factors are complex and qualitative as capital markets are
not perfect and the decisions have to be taken knowing
consequent risks

5. FEATURES OF THE CAPITAL STRUCTURE
Planning is based on the interest
of shareholders
To be determined at initial stage
Capital Structure decision is a
continIous process

6. COMPONENTS OF CAPITAL STRUCTURE
THEREOTICAL
ANALYTICAL
 Profitability
 Flexibility
 EBIT-EPS relationship
 ROI-ROE relationship
 Cost of capital
 Debt ratio
 Size of the company
 Debt-equity ratio
 Marketability
 Total capitalization ratio
 Control
 Interest coverage ratio
 Cash Flow

7. CASH FLOW
 Conservatism related to the assessment of liability of
fixed charges
 Amount of fixed charges are high when large debt is
employed
 Debt should be raised only when provision for future cash
flow exists
 It is risky to employ sources of capital with fixed charges
for companies whose cash inflows are unstable or
unpredictable

8. SIZE OF THE COMPANY
Small Companies Large Companies
 Finds it difficult to raise long-  Greater degree of
term loans, available at a flexibility in designing its
high rate of interest and on
inconvenient terms capital structure
 Restrictive covenants in  It can obtain loans at easy
loans make their capital terms and can also issue
structure quite inflexible ordinary shares,
 The management thus preference shares and
cannot run business freely debentures to the public
 They have to depend on
 Management can run
owned capital and retained
earnings for their long-term business more freely
funds

9. CAPITAL STRUCTURE DECISION
THE TARGET
 Minimize the cost of capital
 Maximize the value of the firm

10. EBIT-EPS ANALYSIS
 How sensitive is EPS to changes in EBIT under
different financing alternatives
EPS = [(EBIT – I)(1 - t)] / n
I = interest burden
t = tax rate
n = number of equity shares

11. Assumptions
 Plan A: all debt, no equity shares
 Plan B: 75% debt, 25% equity shares
 Plan C: 50% debt, 50% equity shares
 Plan D: 25% debt, 75% equity shares
 Plan E: no debt, all equity shares
 Interest rate = 9%
 Tax rate = 14.71%

12. Calculations
A B C D E
EBIT 12208.4 12208.47 12208.47 12208.47 12208.47
7
INTEREST 1098.76 824.07 549.38 274.69 0
EBT 11109.7 11384.4 11659.09 11933.78 12208.47
1
TAX 1634.23 1674.24 1715.05 1755.45 1795.86
EAT 9475.48 9709.76 9944.04 10178.33 10412.61
NO OF 4121.1 4140.9
ALL FIGURES IN HK$ MILLIONS 4160.72 4180.53 4200.35
SHARES
EPS 2.3 2.34 2.39 2.43 2.48

13. DEBT VS EPS
Proportion of debt
2.5
2.48
2.46
2.44
2.42
2.4
EPS
2.38
2.36
2.34
2.32
2.3
2.28
0 0.2 0.4 0.6 0.8 1 1.2

14. HUTCHISON’S CASE
 Financing from cash on hand, internal cash
generation
 Long term projects, large capital requirements
 Increased outstanding debts and capital
commitments
 Alternative source of financing
 Appropriate mix of debt and equity

15. ROI-ROE ANALYSIS
 Relationship between return on investment and
return on equity for different financing options
ROE = [ROI + (ROI – r)D/E](1-t)
r = cost of debt
D/E = debt – equity ratio
t = tax rate

16. CALCULATIONS
1. D/E = 0.67
ROI 5% 9% 15% 20%
ROE 1.98% 7.67% 16.22% 23.34%
2. D/E = 1
ROI 5% 9% 15% 20%
ROE 0.85% 7.67% 17.9% 26.4%
3. D/E = 1.5
ROI 5% 9% 15% 20%
ROE -0.85% 7.67% 20.17% 31.1%

17. ROE VS ROI
ROE
35
30
25
20
D/E=.67
15 D/E=1
D/E=1.5
10
5
0
5 9 15 20
-5 ROI

18. COST OF CAPITAL
 Minimize the cost of capital
 Depends on expected returns and risk
 Rate of interest fixed and company legally bound to pay
interest for debt holders
 Rate of dividends not fixed and company not legally
bound to pay dividends in case of shareholders
 Debt – a cheaper source of funds
 Tax deductibility of interest charge

19. DEBT VS COST OF CAPITAL
Cost of
capital
Debt

20. CONTROL
 Existing management’s desire to continue its control over
the company
 Risk of loss of control when new shares are issued
 Use debt to avoid loss of control
 49.9% shares owned by Cheung Kong holdings
 New shares required – a very small percentage of
existing shares
 Loosing control was not really a problem for the company

21. Ratios
Debt-Equity Ratio
Measurement of how much suppliers, lenders, creditors and obligors
have committed to the company versus what the shareholders have
committed
Provides a general indication of a company's equity-liability relationship
Large, well-established companies can push their liability structure to
higher percentages without getting into trouble.

22. Calculations
Current Future
Scenario Scenario
100%D, 0 75%D, 50%D, 25%D, 0%D,
%E 25% E 50%E 75%E 100%E
Total 26177 30044.5 29077.63 28110.75 27143.88 26177
Liabilities(
A)
Shreholde 58839 58839 59805.88 60772.75 61739.25 62706.5
r’s
Funds(B)
D/E 0.44 0.51 0.48 0.46 0.44 0.41
Ratio(A/B)
 Current D/E Ratio is ideal
 Even if US$ 500M is raised through entire debt the ratio
remains at 0.51 which is also quite stable

23. Total Debt Ratio
Compares a company's total debt to its total assets
• A low percentage means that the
company is less dependent on
leverage
• higher the ratio, the more risk

24. Calculations
Current Future
Scenario Scenario
100%D, 0% 75%D, 50%D, 25%D, 0%D,
E 25% E 50%E 75%E 100%E
Total 31503 35370.50 34403.63 33436.75 32469.88 31503
Liabilities
(A)
Shreholder’ 58839 58839 59805.88 60772.75 61739.63 62706.5
s Funds(B)
Inference0.54
Total Debt 0.60 0.58 0.55 0.53 0.50
Ratio(A/B)
 Current Total Debt Ratio is quite good
 Higher the debt , Higher is Total Debt Ratio

25.  Capitalization Ratio
Measures the debt component of a company's capital structure to
support a company's operations and growth
Describe the makeup of a company's permanent or long-term
capital
Prudent use of leverage increases the financial resources available
for growth and expansion
Highly leveraged company may find its freedom of action restricted
by its creditors or have its profitability hurt by high interest costs

26. Calculations
Current Future
Scenario Scenario
100%D, 75%D, 50%D, 25%D, 0%D,
0%E 25% E 50%E 75%E 100%E
Long Term 26174 30041.5 29074.55 28107.5 27140.88 26174
Debt(A)
Total 85013 88880.5 88880.5 88880.5 88880.5 88880.5
Capitalizati
on (B)
Total 0.31 0.34 0.33 0.32 0.30 0.29
Capitalizati
Inference
on
Ratio(A/B)
 Current Capitalization of 0.31 provides a cushion to
investors
 Even if whole US $500M is raised through debt, the total
capitalization will still be stable

27.  Interest Coverage Ratio
Determine how easily a company can pay interest expenses
on outstanding debt
The lower the ratio, the more the company is burdened by
debt expense
The non-payment of debt principal is a seriously negative
condition
A company finding itself in financial/operational difficulties
can stay alive for quite some time as long as it is able to
service its interest expenses.

28.  Calculations
Current Future
Scenario Scenario
100%D, 75%D, 50%D, 25%D, 0%D,
0%E 25% E 50%E 75%E 100%E
EBIT(A) 11181 12208.47 12208.47 12208.47 12208.47 12208.47
Interest (B) 2808 3906 3632 3357 3082 2808
Interest 3.98 3.13 3.36 3.63 3.96 4.34
Coverage
Ratio(A/B)
 Current Ratio of 3.98 is quite good.
 Company can pay its interest obligations easily
 As Debt borrowed increases, Interest Coverage decreases

29. COMPARISONS

30. EBIT INTEREST COVERAGE
EBIT / Interest Expense
5.1
5.05
•Suggestion: 5
•Improve EBIT by
4.95
optimizing company’s
4.9
operational costs.
4.85
4.8
1995
Hutchison
4.9
Whampoa
Industry
5.05
avg

31. EBITDA INTEREST COVERAGE
EBITDA / Interest Expense
3.8
3.7
•Comparatively better 3.6
• It can be further improved 3.5
3.4
by reviewing the tangible and 3.3
intangible assets of the 3.2
company. 3.1
3
1995
Hutchison
3.7
Whampoa
Industry
3.25
avg

32. FUNDS FROM OPERATIONS/ TOTAL DEBT(%)
Operating Cash Flow / Total Debt
•Funds generated from
40
operations are less related to 35
debts. 30
•Operating cost for this 25
company is high. 20
15
10
•Suggestions: 5
•Need to optimize the 0
operations by employing 1995
Skilled labour, latest Hutchison
14.8
Whampoa
technology etc.
Industry
36.3
avg

33. FREE OPERATING CASH FLOW/ TOTAL DEBT
(%)
Free Operating Cash Flow = EBIT(1-Tax Rate) +
Depreciation & Amortization - Change in Net Working
Capital - Capital Expenditure
50
45
•Poor performance in terms 40
35
of Free operating cash flow. 30
25
20
•Suggestion: 15
10
Company should sell some 5
0
of its inefficient assets. 1995
Hutchison
7.3
Whampoa
Industry
46.2
avg

34. OPERATING INCOME/SALES(%)
Operating Income / Total Sales (Revenue)
20
• Is an indicator of 18
profitability of a company 16
14
12
• Hutchison Wampoa is 10
performing better in 8
terms of profitability. 6
4
2
• Operational optimization 0
can further improve the 1995
performance. Hutchison
17.8
Whampoa
Industry
11.43
Avg

35. LONG TERM DEBT/CAPITAL(%)
Long Term Debt / Long Term debt + Preferred Stock +
Common Stock
• Higher value for 35
Hutchison Wampoa 30
indicates that it is 25
20
relying more on long
15
term debts.
10
5
• Suggestion: 0
1995
Short terms debts
Hutchison
can be one of the 28.9
Whampoa
options. Industry
22.35
avg

36. TOTAL DEBT/CAPITALIZATION(%)
Debt / Debt + Shareholders’ Equity
50
• This is not a good 45
40
indication as higher debt 35
value will limit company’s 30
25
flexibility. 20
15
10
5
0
1995
Hutchison
44.8
Whampoa
Industry
31.05
avg

37. RETURN ON EQUITY(%)
Net Income / Shareholders Equity
• Comparatively better 18
performance as 16
Hutchison Wampoa is 14
giving a higher return 12
10
on equity. 8
6
4
2
0
1995
Hutchison
16.5
Wampoa
Industry
10.75
avg

38. CONCLUSION
 On the basis of the analytical and theoretical criteria
we propose a capital structure for the company
comprising of 60% debt and 40% equity which will
minimize the cost of capital and maximize the value
of the firm.
%
EQUITY
40%
DEBT
60%

39. MARKETABILITY
Ability of the company to
sell or market particular
type of security in a
particular period of time
which in turn depends upon
-the readiness of the
investors to buy that
security
Sometimes market favours
debenture issues and at
another time, it may readily
accept ordinary share
issues
Company decides whether
to raise funds through
common shares or debt
based on changing market
sentiments

40. FLOATATION COST
 Floatation costs are incurred when the funds are raised
 Cost of floating a debt is less than the cost of floating an
equity issue, hence companies use debt rather than
issuing ordinary shares
 If the owner's capital is increased by retaining the
earnings, no floatation costs are incurred

41. THANK YOU