A financial performance analysis of bundura nickel ltd by mr lenon watambwa (2019) abstract
The residual earnings valuation mode
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- Capital structure analysis
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| The residual earnings valuation mode: There are many ratios that can be calculated from the financial statements and the equity analyst has to identify those that are important. The residual earnings equity valuation model brings focus to the task. The model can be applied to the valuation of any asset but the focus here is on the common equity. The model states the value of common equity at date 0 as π½ π π¬ = πͺπΊπ¬ π + β π π¬ βπ [ β π=π πͺπ΅π° π Μ Μ Μ Μ Μ Μ Μ β (π π¬ β π)πͺπΊπ¬ πβπ ] Μ Μ Μ Μ Μ Μ Μ Μ Μ Μ Μ where CSE is the book value of common equity, CNI is comprehensive (net) income available to common, rE is one plus the required return for common equity (the equity cost of capital, and t is a counter of future years beyond the current year, year 0. CNI ( -1) CSE t E tr is residual earnings or residual income and we will refer to it as REt. Bars over numbers they are forecasted amounts. Inmost cases, value is recognized earlier in the residual income model compared with other present value models of stock value, such as the dividend discount model. Strengths of the residual income model include the following οΌ Terminal values do not makeup a large portion of the value relative to other models. οΌ The models use readily available accounting data. οΌ The models can be used in the absence of dividends and near-term positive free cash flows. οΌ The models can be used when cash flows are unpredictable. Weaknesses of the residual income model include the following οΌ The models are based on accounting data that can be subject to manipulation by management. οΌ Accounting data used as inputs may require significant adjustments. οΌ The models require that the clean surplus relation holds, or that the analyst makes appropriate adjustments when the clean surplus relation does not hold. Capital structure analysis: The capital structure of BNC agrees with the Pecking Order Theory which stipulates that firms prefer to use internal funds first followed by debt financing and lastly, equity. Abor (2005) studied the influence of capital structure on profitability of the 22 companies listed on the Ghanaian Stock Exchange between the years 1998 and 2002. Results showed that there is a substantial positive relationship between capital structure and return on equity (ROE) and it was deduced that profitable companies have more dependence to financing through liability and that a larger percentage of liabilities in these companies were Electronic copy available at https://ssrn.com/abstract=3521211 16 short term. The findings of Abor fits well to financing structure of BNC as 55% of their debt is in short term loans. Debt financing has both an advantage and a disadvantage on the growth of corporations and for its strategic investments (OβBrien and David, 2010). According to Fama and French (2002), the benefits of debt financing include the tax deductibility of interest and the reduction of free cash flow problems, while the costs of debt financing include potential bankruptcy costs and agency conflicts between stockholders and debt holders. SWOT Analysis: SWOT as defines by Tony Davies and Brain Pains in Business Accounting and Finance (2002) is shorthand for strength, weakness, opportunities and threats. According to the Zimbabwe Geological Survey, the country has got huge potential in komatiite and laterite and more than 30 nickel deposits are known Using the advanced Using advanced SWOT model to identify the most significant factors of the analysis from all the items listed. The identified or highlighted strengths, weakness, opportunities and threats shall be prioritized. Download 1.23 Mb. Share with your friends:
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