The Jamaica Broilers Group Corporate Finance

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The Cost of equity is not risky for the cost allied with equity is low.

Krf = six month Treasury bill as of September 15, 2017 (see in appendix).

Capital gains on Stock

$ 1.40 ($1.425)

Cost of Equity

6.3%

Weighted Equity

65%

Cost of Debt

7.5%

Weighted Debt

35%

WACC

6.72%

Measuring Investment Return

The Jamaica Broilers Group currently have no operating projects for the current period.

Capital Structure Choices

Debt is an amount owed to a person or organization for funds borrowed. Debt can be represented by a loan note, bond, mortgage or other form stating repayment terms and, if applicable, interest requirements. These different forms all imply intent to pay back an amount owed by specific date, which is set forth in the repayment terms.

Equity is the value of an asset less the value of all liabilities on that asset.

Based on the previous calculations of Jamaica Broiler’s Group debt -to -equity ratios from year ending 2014-2016 the findings shows a decrease in figures on a yearly basis. Low debt-to-equity ratios may indicate that this company is not taking advantage of the increased profits that the financial leverage would bring.

Year

Debt Financing

Equity Financing

2014

$3,568,071.00

$10,521,218.00

2015

$6,354,931.00

$11,396,414.00

2016

$7,079,801.00

$13,102,210.00

Return on equity is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. ROE is one of the most fundamental steps to measure profitability; it is also important for investors because it reveals how much profit a company has earned after-tax in comparison to the total amount of shareholder equity found in the balance sheet. (See Appendix 13)

For the purpose of this analysis we are going to assume that an increasing ROE represents an advantage to the company where as a decrease represents a disadvantage.

Advantages

Disadvantages

- Retain control: upon agreeing to debt financing from a lending institution, the lender has no say in how you manage your company. You make all the decisions. The business relationship ends once loan is repaid in full.

- Tax advantage: The amount you pay in interest tax deductible, effectively reduces net obligation

- Easier planning: Outlined amount to be paid towards principal and interest therefore making it easier to budget and make financial plans

- Qualification requirements: Credit rating must be good enough in order to receive financing

- Discipline: Must exercise restraint and use good financial judgment when using debt instruments as financial discipline is required to make timely payments.

- Collateral: By agreeing to provide collateral to the lender, you could put some business at potential risk.

Return on equity measures how efficiently a firm can use the money from the shareholders to generate profits and grow the company. Based on the above calculations Jamaica Broilers Group with a declining ROE many need to use more financial leverage by increasing the amount of debt capital relative to its equity capital.

Optimal Capital Structure

Cost of capital is plainly the cost an entity must pay to raise money through bank loans or issuing bonds. There are many factors that affect Cost of capital such as Market conditions, levels of

financing, operating and economic conditions. The Cost of Capital Approach, the optimal debt ratio is the same that minimizes the cost of capital for an organization.

Cost of capital may differ, that is, for funds raised with bank loans, sale of bonds, or equity financing. Hence, weighted average cost of capital (WACC) symbolize the suitable cost of capital for the firm as a whole. Calculating WACC is a matter of summing the capital cost factor, multiplying each by its proportional weight.

Debt to equity ratio = Debt

Debt +Equity

2016 2015 2014

$6,354,931 $7,079,801 $6,148,062

$6,354,931+$11,396,414 $7,079,801+$13,102,210 $6,148,062+$10,521,218

=0.36 =0.35 =0.39

Debt Ratio

Equity Ratio

Cost of Equity

After Tax cost of Debt

Cost of Capital

0

100%

27.2

26.7

27.2

20%

80%

29.6

27.1

29.6

40%

60%

31.7