Bamburi Cement Company Example For Free - Free Essay Example

Sample details Pages: 8 Words: 2462 Downloads: 1 Date added: 2017/06/26 Category Finance Essay Type Narrative essay Did you like this example? Bamburi Cement Ltd. (Bamburi Cement) is a Kenya based cement production company. Bamburi Cement, through its subsidiaries is primarily engaged in the manufacture and sale of cement and cement related products, which include the Portland cement, Portland pozzolana cement and Portland limestone cement. Don’t waste time! Our writers will create an original "Bamburi Cement Company Example For Free" essay for you Create order The companyÂÂ ´s products are marketed under various brand names which include Power Plus Cement, Nguvu Cement, Supaset, Multi Purpose and Plasta Plus. Bamburi Cement also owns and manages a world class nature and environmental park that was developed from the rehabilitation quarries. The company has its operations in Kenya and Uganda. The company is headquartered at Nairobi, Kenya. In this study, Bamburi Cement has used the total debt-to-assets (or debt-to-capital employed) as a measure of its capital structure. Total debt includes interest bearing long-term and short-term debt. Assets include fixed assets and those current assets that are financed by debt. This paper is divided into several sections namely; Definition of Capital Structure; Rajan and Zingales (1995) argue that the definition of capital structure would depend on the objective of the analysis. For example, for agency-problem related studies, capital structure maybe measured by total debt-to-firm value ratio ., Relevance of Capital Structure; The prevailing argument, originally developed by Modigliani and Miller (1958), is that an optimal capital structure exists which balances the risk of bankruptcy with the tax savings of debt.ÂÂ   Once established, this capital structure should provide greater returns to stockholders than they would receive from an all-equity firm. Evaluation of the Capital Structure of Bamburi Cement Company; Bamburis debt-asset ratio of 22.9% and capitalization ratio of 24.2% shows that it is less dependent on leverage, i.e., money borrowed from and/or owed to others. As seen elsewhere in this paper Bamburi Cement operates in a highly dynamic environment and their choice of capital structure measure resonates well with what modern thinking is, about, finding the right or best financing mix. Firms in industries characterized as exhibiting high levels of dynamism are more successful if they had relatively low levels of debt. One of the dramatic changes cre ated by the expanding global economy is the increase in the rate of change within industries. And as more industries experience greater levels of change, the use of debt-centered governance will prove less effective in the near future. The other areas covered include; determinant factors of Capital Structure, Limitations in improving Capital Structure and How to improve Capital Structure. INTRODUCTION Bamburi Cement Ltd. was founded in 1951 by Felix Mandl a director of Cementia Holding A.G. Zurich. Cementia later went into partnership with Blue Circle PLC (UK). In 1989, Lafarge, the worlds largest building materials group, acquired Cementia, and thus became an equal shareholder with Blue Circle. Lafarge bought Blue Circle in 2001 to become the largest building materials company in the world and Bamburi Cement Limited principle shareholder. Its first plant Mombasa started production in 1954 with annual capacity of 140,000 tonnes of cement. Today the Mombasa based plant has the capacity to produce of 1.1 million tonnes. In 1998, a new one million tonne per annum clinker grinding plant was added just outside Nairobi, increasing the total production capacity to 2.1 million tonnes. With the new plant, Bamburi Cement has been able to improve its service to Nairobi and upcountry markets, through speedier and more efficient packing turn around time, The rail sliding at the Nairob i plant has also facilitated sales to Western Kenya and Uganda. Bamburi Cement is the largest cement manufacturing company in the region and its Mombasa plant is the second largest cement plant in sub-Saharan Africa. It is also one of the largest manufacturing export earners in Kenya, exporting 28 per cent of its production in 1998 (29 per cent). Export markets include Reunion, Uganda and Mayotle. In the past, they have also included Mauritius, Sri Lanka, The Comoros, Madagascar, Seychelles and the Congo. Bamburi is primarily engaged in the manufacture and sale of cement and cement related products. Bamburi also owns and manages a world class nature and environmental park developed from rehabilitated quarries. Bamburi has financed its various expansion projects through debt over the last six years although its capital structure is a mix of debt and equity. However, there is a reduction in borrowings propping up the cash balances that are expected to fund expansionary capita l expenditure. Firms are free to choose whatever mix of debt and equity or capital structures they desire to finance their assets, subject to the willingness of investors to provide such funds. In some firms, such as Chrysler Corporation, debt accounts for more than 70 percent of the financing, while other firms, such as Microsoft, have little or no debt. A firms capital structure should attempt to determine what its optimal, or best, mix of financing should be. Determining the exact optimal capital structure is not a science, so after analyzing a number of factors, a firm establishes a target capital structure it believes is optimal, which is then used as a guide for raising funds in the future. This target might change over time as conditions vary, but at any given moment the firms management has a specific capital structure in mind, and individual financing decisions should be consistent with this target. 1.1 Definition of Capital Structure Capital structure could be defined in different ways. In the US, it is common to define capital structure in terms of long-term debt ratio. In a number of countries, particularly the emerging markets, companies employ both short-term and long-term debt for financing their assets, including current assets. It is also common for companies in developing countries to substitute short-term debt for long-term debt and roll over short-term debt. Hence, it is more appropriate and particularly in the context of developing economies, to define capital structure as total debt ratio. Rajan and Zingales (1995) argue that the definition of capital structure would depend on the objective of the analysis. For example, for agency-problem related studies, capital structure maybe measured by total debt-to-firm value ratio. Debt could be divided into its various components, and numerator and denominator could be measured in book value and market value terms. In this study, Bamburi Cement has used the total debt-to-assets (or debt-to-capital employed) as a measure of its capital structure. Total debt includes interest bearing long-term and short-term debt. Assets include fixed assets and those current assets that are financed by debt. 1.2 Relevance of Capital Structure A capital structure that is appropriate is a decision that is critical for any kind of business organization. Such a decision is vital not only due to the impact it would have on the organizations ability to handle its competitive environment but also the need to maximize returns to the different organizational constituencies. There is a prevailing argument developed originally by Miller and Modiglian (1958), which states that there is the existence of an optimal capital structure that balances the tax savings of debt with the risk of bankruptcy. Once such a capital structure is established it is capable of providing bigger returns to the stakeholders than they would get from an all-equity organization. Across the industries there are significant differences in the environmental characteristics impacting organizations. The most relevant among the characteristics is environmental dynamism which is defined as the rate of environmental change and the instability of that change. Env ironmental dynamism is usually as a result of different forces operating at one time. They include an increase in the number and size of organizations within a certain industry, increase in the rate of technological variation plus its diffusion throughout that industry. For all involved parties (including stockholders, debt-holders, top managers and others), as environmental dynamism increases it results in an increase in actors increased inability to assess both the present and the future state of the environment accurately. This limits their ability to establish the potential impact of decision-making on future and current business activities and determining feasible alternative that organizations should pursue. This means that the effect of increasing environmental dynamism levels is reduction of access to knowledge required in making critical decision. This as a result reduces the predictability and stability of relations among organizations and their constituents within a ce rtain industry. It is thus a logical inference that varying degrees of environmental dynamism could have a differential influence on similar activities occuring between industries. This means that since the degree of environmental dynamism varies across industries, it would be reasonable to expect significant differences in adaptive capabilities that are required for survival and that such differences should have implications on performance. Table 1 below can verify this. It is a table showing a rank ordering of industries based on their extent of measured environmental dynamism. The industries located towards the top of this table are those characterized as having high dynamism level. This means that the rate of change plus the degree of uncertainty about future states makes decision-making hard. Conversely, the firms in the industries found towards the bottom of the table are in relatively benign environments. Table 1 . This study is a serious test to the traditional capital structure literature.ÂÂ   One of the dramatic changes created by the expanding global economy is the increase in the rate of change within industries. As more industries encounter greater levels of change, the use of debt-centered governance will prove less effective in the near future. Bamburi cement operates in an environment that is highly dynamic and their choice of capital structure measure resonates well with what modern thinking is, about, finding the best or right financing mix. Firms in industries characterized as exhibiting high levels of dynamism are more successful if they had relatively low levels of debt. 1.3 Evaluation of the Capital Structure of Bamburi Cement Company In this study, Bamburi Cement has used the total debt-to-assets (or debt-to-capital employed) as a measure of its capital structure. Total debt includes interest bearing long-term and short-term debt. Assets include fixed assets and those current assets that are financed by debt. Period Year 6-2009 Year 5-2008 Year 4-2007 Year 3-2006 Year 2-2005 Year 1-2004 Sources of Funds: Kes millions Share capital Reserves 20,941 16,602 15,075 13,736 11,281 10,485 Long Term Debt 6,227 6,170 2,422 2,319 2,230 2,348 27,168 22,772 17,497 16,055 13,511 12,833 Weight of Sources of Funds: Share capital Reserves (we) 0.7579 0.71522 0.85454 0.84878 0.82725 0.8077 Long Term Debt (wd) 0.24206 0.28477 0.14545 0.15121 0.17274 0.1922 Dividends per share 11.00 6.00 6.00 5.50 5.30 6.12 Market price per share 156.00 165.00 196.00 215.00 140.00 95.00 Cost of Sources of Funds Cost of Share capital (ke) 7.05128 3.6363 3.0612 2.5581 3.7857 6.4421 Interest rate, i 9.5 9.5 9.5 9.5 9.5 9.5 Corporation tax, t 0.3 0.3 0.3 0.3 0.3 0.3 Long Term Debt (kd), i(1-t) 6.65 6.65 6.65 6.65 6.65 6.65 Growth in Equity (G) 25.82 8.90 9.31 21.89 8.27 (10.43) Ke+G 32.87 12.54 12.37 24.45 12.06 (3.99) kewe 25.34 9.14 10.66 20.92 10.07 (3.26) kdwd 1.5242 1.8017 0.9205 0.9605 1.0975 1.2167 Weighted Cost of Capital, WACC (%) Ko= kewe+ kdwd 26.8609 10.9446 11.5800 21.8802 11.1662 -2.0448 Net profit Kes millions 6,970 3,412 3,810 2,799 2,155 1,901 Total Assets Kes 000 27,168 22,772 17,497 16,055 13,511 12,833 Return On Investment (ROI %) 25.655 14.9833 21.7751 17.4338 15.9499 14.8133 1.5 Determinant factors of Capital Structure Factors Determining Capital Structure Trading on Equity- Trading on equity becomes more significant when expectations of shareholders are soaring. Degree of control- Bamburi would like to preserve their voting rights in their hands and thus the capital structure consists of debenture holders and loans rather than equity shares. Flexibility of financial plan- In Bamburi t there is both contractions as well as relaxation in plans and therefore the company has gone for issue of debentures and other loans. Choice of investors- Bamburis policy is to have different categories of investors for securities. The capital structure thus gives adequate choice to all kinds of investors to investor while keeping into mind conscious investors. Capital market condition- In the lifetime of the company, the market price of the shares has got an important influence. During the depression period, the companys capital structure generally consists of debentures and loans. While in period of inflation and boons , the companys capi tal should consist of share capital generally equity shares. Period of financing- When Bamburi wants to raise finance for short period, it goes for loans from banks and other institutions; while for long interval it goes for issue of debentures and shares. Cost of financing- In a capital structure, the company has to look to the factor of cost when securities are raised. It is seen that debentures at the time of profit earning of company ascertain to be a cheaper source of finance as compared to equity shares where equity shareholders demand an extra share in profits. Stability of sales- An established business which has a growing market and high sales turnover, the company is in position to meet fixed commitments. Interest on debentures has to be paid regardless of profit. Therefore, when sales are high, thereby the profits are high and company is in better position to meet such fixed commitments like interest on debentures and dividends on preference shares. If company is having unstable sales, then the company is not in position to meet fixed obligations. So, equity capital proves to be safe in such cases. Sizes of a company- Small size business firms capital structure generally consists of loans from banks and retained profits. While on the other hand, big companies having goodwill, stability and an established profit can easily go for issuance of shares and debentures as well as loans and borrowings from financial institutions. The bigger the size, the wider is total capitalization. 1.6 Limitations in improving Capital Structure Four problems that tend to increase as leverage escalates: (1) a growing risk of bankruptcy; (2) lack of access to the capital markets during times of tight credit; (3) the need for management to concentrate on finances and raising additional capital at the expense of focusing on operations; (4) higher costs for whatever additional debt and preferred stock capital the company is able to raise. Aside from the unpleasantness involved, it is noted that each of these factors also entails tangible monetary costs. 1.7 How to improve Capital Structure Effective capital structure management can he achieved through consistent use of the following strategies. strategy 1. organize for effective capital structure management Bamburi will ensure that the board of directors and senior leaders are on the same page about the benefits and importance of effective capital structure management to the organizations competitive financial performance by providing education, establishing the team, and defining the organizations attitude toward risk. strategy 2. determine the appropriate level of debt capacity Bamburi has over the years been able to successfully establish the parameters of the debt portion of the capital structure to remain strategically and financially competitive. strategy 3. determine the optimal mix of debt-to-equity financing and traditional-to-nontraditional financing As a result Bamburi knows how much it can borrow in the debt markets and how much capital it needs to come from other sources, both traditional and nontraditional. Targets for the appropriate debt to equity ratio are based on debt capacity, rating agency benchmarks, and tolerance for risk. Bamburi has to monitor and continuously adjust the debt portfolio to maintain maximum flexibility, lowest possible interest costs, and acceptable levels of risk.The importance of effective and efficient capital structure management to an organizations long-term competitive strategic financial performance cannot be overemphasized. Use of the above capital structure management strategies will increasingly reward the organization with the know-how and muscle to achieve a strategic financial competitive advantage.