Question
For the financial year ending 30 June 2017, Sigma Healthcare Ltd (SIG) reported the following sources of financing in its balance sheet. Sigma Healthcare Ltd
For the financial year ending 30 June 2017, Sigma Healthcare Ltd (SIG) reported the following sources of financing in its balance sheet.
Sigma Healthcare Ltd Balance Sheet (as at 30 June 2017)
Financial Structure ($ thousands) | |
Liabilities | |
Current liabilities | |
Accounts payable | $523,770 |
Short-term/current debt | 14 |
Other current liabilities | 50,823 |
Total current liabilities | $574,607 |
Long-term debt | 1,061 |
Other long-term liabilities | 4,627 |
Long-term liabilities | $5,688 |
Shareholder's equity | $538,587 |
Total liabilities and shareholder's equity | $1,118,882 |
Moreover, the firm's 2017 income statement reported net profit of $53.5 million with interest expense of $4.3 million.
Sigma Healthcare Ltd Income Statement (for the year ended 30 June 2017)
($ thousands) | |
Earnings before interest and tax | $80,955 |
Interest expense (net) | (4,286) |
Profit before tax | 76,669 |
Income tax expense | (23,163) |
Net profit | $53,506 |
If Sigma's management were considering the possibility of using significant debt financing for the first time, it might look at CSL Ltd (CSL), Australia's largest pharmaceutical company, as a benchmark firm for comparison purposes. CSL used debt financing, as shown on the following balance sheet and income statement.
CSL Ltd Balance Sheet (as at 30 June 2017)
Financial Structure ($ thousands) | |
Liabilities | |
Current liabilities | |
Accounts payable (incl. other payables) | $1,155,800 |
Short-term/current debt | 122,500 |
Other current liabilities | 339,800 |
Total current liabilities | $1,618,100 |
Long-term debt | 3,852,700 |
Other long-term liabilities | 488,100 |
Long-term liabilities | $4,340,800 |
Total liabilities | $5,958,900 |
Shareholder's equity | $3,163,800 |
Total liabilities and shareholder's equity | $9,122,700 |
CSL Ltd Income Statement (for the year ended 30 June 2017)
($ thousands) | |
Earnings before interest and tax | $1,768,900 |
Interest expense (net) | (79,100) |
Profit before tax | 1,689,800 |
Income tax expense | (352,400) |
Net profit | $1,337,400 |
Question
Describe the capital structure of CSL, using both the debt ratio and the interest-bearing debt ratio.
Question
Suppose that Sigma has decided to issue debt financing and use the proceeds to purchase some of its shares from the open market. What fraction of the firm's 993 million shares does the firm need to repurchase to make its interest-bearing debt ratio equal to that of CSL?
If Sigma had carried out the transaction by issuing bonds with an annual interest rate of 8%, what would its earnings per share have been in 2017?
Question
Do you think Sigma's proposed change of capital structure makes good financial sense? Why or why not?
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Answer to Question 1 The capital structure of CSL can be described using the debt ratio and the interestbearing debt ratio The debt ratio of CSL is De...Get Instant Access to Expert-Tailored Solutions
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